ANNUAL REPORT 2016
Shiseido Company, Limited [For the period ended December 31, 2016]
Be a GlobalWinner with Ou r We will win in Japan and around the world
and strengthen individual Shiseido Group brands.
Our initiatives are having a definite effect.
We will continue reforms with sights set on 2020 and beyond.
Heritage
3
Overview
This annual report seeks to achieve fruitful dialogue with shareholders and investors by presenting in a
condensed format our initiatives toward achieving increased corporate value in the medium-to-long term.
Forward-Looking Statements In this annual report, statements other than historical facts are forward-looking statements that reflect the Company’s plans and expectations. These forward-looking statements
involve risks, uncertainties and other factors that may cause actual results and achievements to differ from those anticipated in these statements.
Editorial Policy/Contents
6 Our Mission, Values and Way
7 Value Creation Model
8 Shiseido’s DNA
10 Facts & Figures
12 Brands at a Glance
Region × Brand23
51
14
24 Six Regional Headquarters and Our Global ManagementStructure
26 Japan
28 China
30 Americas
32 EMEA
34 Asia Pacific
35 Travel Retail
Financial Strategy forIncreasing Corporate Value over the Medium-to-Long Term
46
47 The CFO on Shiseido’s Financial Strategy
48 Main Themes in Detail
Looking toward2020 and Beyond
36
37 A Message from the Executive Vice President
38 Sustainability Strategy
40 Aspirations in Three Areas
42 Generating Innovation
Management Section
52 Directors, Audit & Supervisory Board Members and
Corporate Officers
56 A Message from an External Director
57 Corporate Governance
63 Data Section
64 Financial and Non-Financial Highlights
68 Market Data
70 11-Year Summary of Selected Financial Data
72 Financial Section
110 Corporate and InvestorInformation
111 Summary of Information by Topic
Engagement Agenda 1 Engagement Agenda 2 Engagement Agenda 3
The CEO on Shiseido’s Management Strategy
4
Reporting Period
Annual Report 2016 primarily covers results for the year ended December 2016 (January 1, 2016 to December 31, 2016). It also includes certain information from before and shortly after this period.
Scope of Coverage
In principle, Annual Report 2016 covers Shiseido Company, Limited (the Company) and its 90 consolidated subsidiaries (collectively, the Shiseido Group) as of December 31, 2016, except as otherwise noted.
Guidelines for Disclosing Non-Financial Information
• United Nations Global Compact
• ISO26000 (international guidance standard for social responsibility issued by the International Organization for Standardization)
• Sustainability Reporting Guidelines, Version 4 (international guidelines for corporatesustainability reporting issued by the Global Reporting Initiative)
• 2012 Environmental Reporting Guidelines (issued by Japan’s Ministry of the Environment)
Month of Publication
May 2017
Change in Fiscal Year-End
Effective from the previous fiscal period, Shiseido and consolidated
subsidiaries whose account settlement date was March 31 changed
the date to December 31. Following this change, the accounting
period of the previous fiscal period was 9 months, from April 1,
2015 to December 31, 2015 for these companies, and the 12
months to December 31, 2015 for consolidated subsidiaries that
already had a December 31 fiscal year-end. Year-on-year changes in
amounts and percentage are comparisons for reference between the
twelve months ended December 31, 2016 and the twelve months
ended December 31, 2015.
Various information not included in this annual reportis available on our corporate website.Shiseido Group corporate website ▶ http://www.shiseidogroup.com
Annual Report
Beauty/Art
Corporate Cultural Activities, Art
Supporting Activity, Activities of the
Beauty Creation Department, and
other information
Innovation
Our Vision on Technology, History
of Cosmetic Technologies, sys-
tems, history of awards received,
Seminar/Event, and other information
Sustainability
Sustainability strategy with regard
to Core Subjects of ISO26000
(including Human Rights, Labor
Practices, and Environment), Activity
Results Data, GRI Guidelines Index,
and other information
Investors
IR News, F inancial Highlights/
Historical Financial Data, General
Meeting of Shareholders/Corporate
Governance, and other information
About Us
Corporate Information, Business
Overview, Corporate Profile, History
of Shiseido, Major Offices, and
other information
Brands
Informat ion on our brands by
category, such as prestige and
cosmetics
http://www.shiseidogroup.com/company/ http://www.shiseidogroup.com/beauty-art/
http://www.shiseidogroup.com/ir/ http://www.shiseidogroup.com/brands/ http://www.shiseidogroup.com/sustainability/ http://www.shiseidogroup.com/rd/
5
Overview
Our Mission, Values and Way
Our Mission, Values and Way (MVW) is the Shiseido Group corporate philosophy. It codifies the raison d’être,
values and action standards that all Shiseido Group employees must always keep in mind. We want to continuously
increase corporate value by realizing our mission of helping people live beautifully.
6
Consumer-oriented
Global Governance System
Addressing Social Issues and Expectations
VISION2020
Nurture Strong Brands
VISION2020
Be a Global Winnerwith Our Heritage
VISION 2020
Numerical Targets
Net sales over ¥1 trillionOperating income over ¥100 billion
ROE of 12% or higher
VISION 2020
Targeted Outcomes
Flourish as a company supported and needed by society and
consumers worldwide
Through beauty, we will achieve a sustainable society that makes people happy.
Guided by its corporate mission of inspiring a life of beauty and culture, Shiseido seeks to achieve a sustainable
society that makes people happy through beauty. While strengthening the foundation for implementing our strategy,
we maintain a consumer orientation that links all business processes, including research and development, produc-
tion, procurement and consumer care in comprehensive marketing and innovation to achieve strong growth and
create value.
Value Creation Model
7
Shiseido’s DNA
Shiseido constantly creates high-quality, highly functional, safe and
innovative cosmetics and leading beauty techniques, supported by its
industry-leading R&D and production technology capabilities.
Shiseido was founded in 1872 in Ginza, Tokyo, as the first Western-style pharmacy in Japan. The name
Shiseido incorporates our founder’s desire to discover and create new value, a desire that has endured
for more than 140 years and has built our unique heritage. This heritage has led to a foundation and
strengths unique to Shiseido – the DNA shared by all its employees that is key to our successful evolu-
tion going forward.
We will fully leverage and furtherrefine the strengths we have built.
JapaneseAesthetics
Technology & Science
Overview
Shiseido has cultivated its sense of beauty over its long history. As a cos-
metics company originating in Japan, we have made this sense a unique
strength among global companies with our belief in the importance of
Japanese culture and traditions, and our ceaseless attention to detail.
8
Shiseido’s approximately 20,000 beauty consultants worldwide work as
beauty professionals, building close relationships with individual consum-
ers. They aim to enrich both the external appearance and the hearts of
consumers and convey the value of our brands.
Shiseido’s businesses are human centric. This is reflected in our desire to be
consumer-oriented in everything we do, including conveying value to consumers
through our beauty consultants. Our belief in the importance of people as represented
by consumers and our employees is the foundation on which we have formed our values.
Human Centric
Art & Design
OMOTENASHI
Our ability to communicate the value and beauty we create is a major
strength. This strength has driven advertising and design in Japan since
we opened the Shiseido Design Department in 1916.
9
Notes: 1. The fiscal period ended December 31, 2015 is the 9 months from April 1, 2015 to December 31, 2015 for Shiseido and consolidated subsidiaries whose account settlement date was March 31 and the 12 months from January 1, 2015 to December 31, 2015 for consolidated subsidiaries whose account settlement date was December 31. In this report, it is referred to as “the period ended December 2015” in the text and as “2015/12” in tables, charts and graphs. For comparisons with the year ended December 2016, this report uses results for the 12 months ended December 2015, referred to as “2015/12 (Adjusted)” in tables, charts and graphs. 2. Excluding food and daily necessities 3. Year-on-year percentage change is +9% excluding the effect of the termination of the Jean Paul GAULTIER license and the acquisition of the Dolce&Gabbana license. 4. Year-on-year percentage change is +0% excluding the effect of the acquisition of Laura Mercier.
* Europe, Middle East and Africa
¥850.3 billion
+5.2% year on year1 on a local currency basis-1.5% year on year1 on a yen basis
Net Sales
¥36.8 billion
(-17.0% year on year1)
Operating Income
No. 1
Position in Japan and Asia
Approx. 120
Countries and Regions Served
Among Japanese/Asian cosmetics manufacturers for annual sales in the beauty category2
WWD Beauty Inc. annual ranking (April 2017)
Led by the prestige category and supported by the acquisition
and licensing of new brands, net sales grew year on year on a
local currency basis in each region we serve except EMEA.*
However, net sales decreased when translated into yen due to
the pronounced foreign exchange effect of yen appreciation.
Operating income benefited from higher marginal income due
to growth in net sales and the effect of cost structure
reforms, but decreased year on year due to one-time expenses
associated with new brand acquisitions and licensing agree-
ments, and structural reform expenses, as well as to the
larger-than-expected effect of yen appreciation.
Net Sales by Business Segment
Japan
Net sales ¥407.6 billion
+2.9 % YoY
China
Net sales ¥120.5 billion
+11.4 % YoY
billion
% YoY
billion
% YoY3
billion
% YoY4
Travel Retail
Net sales ¥24.8
(Local currency basis)
(Local currency basis)
(Local currency basis)
(Local currency basis)
(Local currency basis)
+60.4
EMEA
Net sales ¥85.2
-8.1
Americas
Net sales ¥162.6+8.0
Asia Pacific
billion
% YoY
Net sales ¥49.6+7.0
48.0%
14.2%
5.8%
19.1%
10.0%
2.9%
Share of
total sales
Overview
Facts & Figures
10
5. For calculating consolidated ROE for the period ended December 2015, the numerator used is net income attributable to owners of the parent for the nine months ended December 31, 2015 for Shiseido and its consolidated subsidiaries whose fiscal year ended in March, and for the 12 months ended December 31, 2015 for consolidated subsidiaries whose fiscal year ended in December. The ROE is 7.6 percent when calculated based on net income attributable to owners of the parent for the 12 months ended December 2015. 6. The number of employees includes full-time employees and temporary employees. Temporary employees include part-time workers. Dispatched employees are excluded. 7. As of January 1, 2017 8. The International Federation of Societies of Cosmetic Chemists is an organization that brings together cosmetic chemists from around the world in pursuit of cosmetic technology development that achieves greater functionality and safety. 9. As of December 31, 2016
4.3%
(-0.8 percentage points year on year1)
Operating Profitability
8.2%
ROE
(6.0%5 for period ended December 2015)
45,000 /66
Employees6,7/Nationalities Employed6
No. 1
Ranking as a Company Empowering Women in Japan
for three consecutive years
Shiseido Group Total
53.2%
Japan
30.0%
Overseas
69.3%
(Nikkei BP, Nikkei Woman)
Operating profitability decreased 0.8 percentage points year
on year reflecting the decline in operating income.Our target for ROE in VISION 2020 is 12 percent or higher.
ROE was 8.2 percent for the year ended December 2016 in
tandem with an increase in EPS.
Awards Received at IFSCC8 Congress
and Conferences (As of November 2016)
Percentage of Female Leaders9
Competitor companies
8 8
6
4
1 1 1 1 1 1
24
Shiseido
Conference Award (Podium Presentation)
Congress Award
Conference Poster Award
Congress Poster Award
Congress Award (Podium Presentation)
11
Brands at a Glance
Year on year1
Share of total sales(Local currency basis)
39.9 %
+15 %
Share of total sales(Local currency basis)
Year on year1
7.9 %
-15 %
Main Regions of Availability (As of March 31, 2017) Japan: ●J China: ●C Asia Pacifi c: ●AP Americas: ●A EMEA: ●E Travel Retail: ●T
Overview
PrestigeHigh-priced, high-added-value products sold through counseling, primarily in department stores and
cosmetics specialty stores
NARS
clé de peau BEAUTÉ●J ●C ●AP●A●E T
BENEFIQUE●J
Laura Mercier
bareMineralsSHISEIDO●AP●J ●C ●E●A T
IPSA●AP●J ●C
ISSEY MIYAKE narciso rodriguezDolce&Gabbana
Fragrance
ISSEY MIYAKE
High-priced, highly fashionable fragrances that offer consumers personal style proposals through collabo-
ration with famous designers
●J ●C ●E●A T●AP2
●E●AP●J ●A2●C●AP●J ●C ●E●A T2
1. Local currency basis
2. Hong Kong only
●J ●AP●A●E T●C 2 ●J ●C ●AP●A●E T2 ●J ●C ●AP●A●E T2
12
Share of total sales(Local currency basis)
Year on year1
31.0 %
+1 %
Share of total sales(Local currency basis)
Year on year1
9.4 %
+2 %
Share of total sales(Local currency basis)
Year on year1
5.5 %
+2 %
Cosmetics
●J ●C
urara●C
HAKU PRIOR●J
ELIXIR●AP●J ●C
MAQuillAGE●AP●J ●C
PURE&MILD●C
●Jd program
Za●C ●AP
●AP●J ●C TANESSA
●JAQUALABEL
●JINTEGRATE
AUPRES●C
Mid- and low-priced cosmetics that consumers select themselves, primarily sold in drugstores and general
merchandise stores. Counseling sales tailored to market, brand and channel characteristics are also offered.
Personal care
Professional
●C ●AP●JSHISEIDO PROFESSIONAL JOICO
●AP ●A●C ●E
●AP●J ●CSENKA
●J ●C ●AP
TSUBAKI●J
SEA BREEZE
Low-priced skincare products, sham-
poo and other haircare products, as
well as body care products, primarily
sold in drugstores and general mer-
chandise stores
Hair care and styling agents, hair color
products and other merchandise for
hair salons
Note: In addition to our core business categories of prestige, fragrance, cosmetics, personal care and professional, “Other” makes up 6.3% of sales. “Other” includes THE GINZA, Frontier Science Business, and Shiseido Parlour.
13
We intend to step up reforms going forward.
The CEO on Shiseido’s Management Strategy
Be a Global Winner withOur Heritage
Net sales
over ¥1 trillionOperating income
over ¥100 billionROE
12% or higher
Numerical Targets (2020 December)
2018-2020
New Strategyto Accelerate
Growth
2015-2017
Rebuild theBusiness
Foundation
Medium-to-Long-Term Strategy VISION 2020
14
Masahiko UotaniShiseido Group CEO
15
When I became President and CEO three years ago, I
declared that I would restore Shiseido’s vitality, and since,
have implemented various reforms. Behind these reforms
were a serious sense of crisis and a desire for a change
shared by all Shiseido employees. Before I assumed
office in 2014, Shiseido was growing as a whole, to a cer-
tain extent, but losing market share in Japan. That region
accounted for about half of total net sales. At the same
time, sales in our overseas businesses were growing.
However, low profitability was an issue. Sluggish sales
and earnings led to several years of aggressive reduc-
tions of investment in consumer-oriented marketing and
R&D. As a consequence, Shiseido struggled to respond
promptly and accurately to changes in consumers and
markets, and so the Company fell into a vicious cycle of
declining consumer support and brand value.
I was convinced that Shiseido would waste its future
if this situation persisted, and so I committed to the
implementation of a substantial shift to a consumer-
oriented approach in all activities throughout the
Company. We began the breakdown of the vicious cycle in
2015 by initiating our medium-to-long-term strategy,
VISION 2020, creating a model that would ensure
Shiseido remains vital for the next 100 years and beyond.
Under VISION 2020, we aim to become a global win-
ner with our heritage. Our targets for 2020 are net sales
of over ¥1 trillion, operating income of over ¥100 billion,
and ROE of 12 percent or higher.
We divided the six years through to 2020 into two
phases. During the first three-year phase, we have been
investing aggressively in rebuilding our business founda-
tion. During the second three-year phase, we intend to
leverage the foundation we build in the first three years
to accelerate and generate significant growth.
The CEO on Shiseido’s Management Strategy
VISION 2020:
Shiseido’s Consumer-Oriented Transformation
Numerical Targets of VISION 2020
5-7%
3-5% (Initial target)
CAGR
CAGR
(Forecast: 6.5%)
2015 2016 2017
Net sales
Operating income No. 1 in JapanNo. 1 in Asia
over ¥1 trillion
over ¥100billion
2020 (Years ended/endingDecember)
Net sales
Operating income
ROE 12% or higher
16
We started by working on enhancing brand value
– the cornerstone for growth. Brands are built by com-
bining consumer-oriented marketing with innovative prod-
uct development. In marketing, we strategically selected
brands positioned for comprehensively reinforced invest-
ment with a focus on consumers. Global prestige brands
including SHISEIDO, clé de peau BEAUTÉ, NARS and IPSA
grew and keep growing substantially as a result. We plan
to increase marketing investment by a combined total of
more than ¥100 billion over the three years from 2015 to
2017. To generate the needed investment capital we
anticipate cost reductions of more than ¥60 billion over
the same period thanks to cost structure reforms. ▶ See “Engagement Agenda 3: Financial Strategy for Increasing
Corporate Value over the Medium-to-Long Term” on pages 46-50
for details.
Next, we addressed and resolved a number of legacy
issues. Specific initiatives included optimizing store
inventories in China and elsewhere in Asia, withdrawing
from unprofitable businesses, and integrating back
office operations and IT systems. We executed these ini-
tiatives with strong determination, all for the future
growth of Shiseido.
In 2016, we committed ourselves fully to creating a
virtuous cycle for future growth.
Increasing Brand Value
Human resources and organizational structure with strong executional abilities
Marketing×
Innovation
AccountabilitySpeedFlat
organizationRegional,
front-line focus
Integratedconsumer-driven
marketing
Product development based on innovative core technologies
A Clear Growth Trajectory in 2016
This included the January 2016 launch of a global
management structure that brought major changes. This
new matrix organization divided into six regional headquar-
ters and five brand categories gives each headquarters
broad authority and responsibility over operations in their
respective regions. Our former organization was centered
on Japan and the head office, but by shifting to the
matrix organization and implementing marketing that is
attuned to the needs of local consumers, we aim to
drive substantial global growth. At the same time, we
implemented organizational reforms in the Americas and
EMEA regions to establish autonomous management
and grow sales and earnings independently.▶ See “Engagement Agenda 1: Region × Brand” on pages 23-35
for details.
In addition, we launched four Centers of Excellence
(CoEs) meant for creating new value. CoEs in regions
that have the greatest global influence in specific cate-
gories lead the Shiseido Group with initiatives ranging
from collecting information to formulating global strategy
and developing products. Japan hosts the Center of
Excellence for skincare, the Americas for makeup and
digital marketing, and Europe for fragrances. We share
results from the CoEs globally to create value across
regions.▶ See “Engagement Agenda 2: Looking toward 2020 and Beyond”
on page 42 for details.
Ongoing Progress of VISION 2020
● Implement strategies for brand selection, concentration and enhancement Renew key brands
● Start the matrix organization and Centers of Excellence
● Acquire and license new brands Laura Mercier and Dolce&Gabbana
● Increase investment in marketing and innovation
● Cost structure reforms
● Optimize store inventories in China and elsewhere in Asia
● Withdraw from unpro�table businesses Greece, Turkey, and the Za business in India
● Integrate organization and raise ef�ciency Integration of back of�ce functions and IT systems
in EMEA and the Americas
● Promote structural reforms in EMEA and the Americas EMEA: Integration of cosmetics and fragrance
organizations
Americas: Structural reforms at Bare Escentuals Inc.
Address and ResolveLegacy Issues Create a Virtuous Cycle
2014/2015 2016 2017 2018 2019 2020
New Strategy to Accelerate GrowthRebuild the Business Foundation
The CEO on Shiseido’s Management Strategy
18
Sales on Growth Track
Strengthening Our Brand Portfolio on a Global Scale
In addition to our organic growth efforts, we added
new brands to our portfolio. We acquired the U.S. makeup
brand Laura Mercier in July 2016. In October 2016, we
entered into a licensing agreement for the world-
renowned fashion brand Dolce&Gabbana. The appropriate
regional headquarters reviewed their brand portfolios
and recommended these strategic brands for their areas
to me and the Board of Directors. These two brands are
sure to contribute to our global growth.
As a successful result of these consumer-oriented
reforms and numerous initiatives, we achieved net sales of
¥850.3 billion for the year ended December 2016. This repre-
sents 5 percent growth for the year on a local currency basis
and follows 4 percent growth for the year ended December
2015. Two consecutive years of growth are a clear indica-
tion that these reforms are working. Evidence that brand
power is increasing steadily includes growing sales cen-
tered on key brands in the prestige category in every
region. In addition to the Japan Business, which is back on
a growth track, operations in the China Business and Travel
Retail are among the biggest contributors to overall success.
As a result of one-time costs stemming from structural
reforms and M&As, operating income was ¥36.8 billion.▶ See “Overview: Facts & Figures” on pages 10-11 for details.
However, we still have issues to resolve.
Some categories have not met our expectations
despite our focused efforts. There still remain issues to
be dealt with from 2017.
2012 2013
2016
2014
+1%
+4 %
+5%
–0.4 %+0.1%
+11%
2017(Forecast)
2015(Adjusted)
Note: The �gure for 2014 excludes the impact of the rebound after the consumption tax hike, market inventory optimization in China and Asia, and distribution center problems in the Americas. The �gure for 2013 excludes the impact of the rush demand before the consumption tax hike and sales of DECLÉOR and CARITA brands.
Laura Mercier Dolce&Gabbana
19
We will complete the rebuilding of our business foun-
dation in 2017, the third year of the first three-year
phase of VISION 2020. We will continue to increase
investment to achieve net sales of ¥1 trillion and operat-
ing income of over ¥100 billion in 2020.
Specifically, we will focus on the following three points.
First, we will continue to increase investment in
growing categories.
Prestige brands will have top priority. We will selec-
tively concentrate investment in prestige, with significant
increases for SHISEIDO and clé de peau BEAUTÉ along-
side other brands. We will also aggressively increase
investment in our new brands, Laura Mercier and
Dolce&Gabbana, which are expected to generate sub-
stantial growth.
At the same time, we will expand Japanese brands
to Asia, in particular China, and accelerate growth by
strengthening communications attuned to local charac-
teristics. Japanese brands are trusted and have a repu-
tation for quality, which is a unique competitive advan-
tage for Shiseido. We will also invest in digital marketing
and other domains that are growing rapidly around the
world. We plan to raise the ratio of e-commerce to over
20 percent of prestige sales by the end of 2020.
Second, we will address lingering issues.
A particularly urgent issue that we will prioritize is
the rejuvenation of bareMinerals, AUPRES, and personal
care products in Japan. In 2016, we implemented funda-
mental structural reforms at Bare Escentuals Inc., the
owner of the bareMinerals brand. We moved its head-
quarters functions from San Francisco to New York City,
where the Americas regional headquarters is located,
and in 2017 launched a new management team with a
goal of growth. Rebranding began in 2016 for the China-
exclusive brand AUPRES, which has not been performing
well in recent years. We reexamined the brand value of
AUPRES, innovating counters, brand communications
and advertising. In 2017, we are targeting a turnaround
to growth by renewing products in three stages – spring,
summer and fall – based on the new brand value.
We will completely overhaul our strategy for personal
care products in Japan, and focus on categories in which
Shiseido demonstrates its strengths.
Third, we will increase productivity.
The task of improving profitability remains, and we
will launch initiatives in categories we have been unable
to address to date. We will make further progress in
ways such as fundamentally reorganizing our business
portfolio and boldly phasing out products and SKUs*
with low profitability. We will also address regional
issues so that all regional headquarters can achieve
double-digit operating profitability by 2020. ▶ See “Engagement Agenda 3: Financial Strategy for Increasing
Corporate Value over the Medium-to-Long Term” on pages 46-50
for details.
Ongoing Investment Increases in 2017
* Stock keeping unit: The smallest distinct item in inventory management
The CEO on Shiseido’s Management Strategy
We are set to implement various initiatives linked to
accelerating growth strategies in the second three-year
phase ending 2020. Stepping up innovation will have
particular emphasis in driving growth over the medium-
to-long term. We will address consumer changes with
the introduction of new value and products. One exam-
ple is our proactive investment in establishing a leading
position in personalized cosmetics, a new field that we
believe will gain great momentum. MATCHCo. is a U.S.
start-up that we acquired in January 2017. The company
is a pioneer in the personalization field.
In the same vein, we will also introduce innova-
tive technologies and ideas from outside Shiseido
through alliances. In December 2016, we established
the venture capital organization Shiseido Venture
Partners. Thus, we are energetically incorporating emerg-
ing value and groundbreaking technologies.
Moreover, we will complete our world-class* research
center, the Global Innovation Center (GIC), located in
Japan, by the end of 2018. The GIC will innovate by
bringing together R&D knowledge and expertise from
around the world.▶ See “Engagement Agenda 2: Looking toward 2020 and Beyond”
on pages 36-45 for details.
Accelerating Growth toward 2020
Focus further on key areas
Give top priority to prestige brands
Accelerate growth of Japanese brands
Strengthen digital communication and e-commerce
Addresslingering issues
Structural reformof Bare Escentuals Inc.
Strengthen AUPRES
Japan: Review strategies for personal care products
Improve productivity
Boldly reorganize brand and business portfolio
Phase out products and SKUs
Key Actions for Completing the Rebuilding of the Business Foundation
Forecast and Initiatives for the Year Ending December 2017
* Other income for the year ended December 2016 included ¥9.0 billion loss on sale of the Kamakura Factory site, and ¥9.0 billion gain on transfer of intel- lectual property rights for the fragrance brand Jean Paul GAULTIER.
Exchange Rates for Major Currencies
Year ending December 2017 (Estimate)USD 1 = JPY 110EUR 1 = JPY 118CNY 1 = JPY 16
Year ended December 2016USD 1 = JPY 108.9 EUR 1 = JPY 120.4CNY 1 = JPY 16.4
(Billions of yen)
Forecast for the Year Ending December 2017 (Announced February 9, 2017)
2017/12(Plan)
2016/12
Year-on-Year Change
(Yen basis)(Local
currency basis)
Net sales 940.0 850.3 +10.5% +11.0%
Operating income 45.5 36.8 +23.7% -
Extraordinary income/loss (Net) -2.5 12.7* - -
Net income attributable to owners of parent
26.0 32.1 -19.0% -
ROE 6.5% 8.2% - -
* A single research facility for cosmetics and beauty care with one of the largest groups of people in the world energetically pursuing high-level open innovation.
21
Four of seven directors and three of �ve Audit & Supervisory Board membersare external (independent)
Governance
Environment Society Culture
Shiseido’s ESCG
We will make Shiseido a company that remains vital
for the next 100 years and beyond. To do so, we must
draw on our corporate mission to “inspire a life of beauty
and culture” by realizing sustainable growth in coopera-
tion with society.
Strengthening corporate governance as a manage-
ment system is essential for sustainable growth.
Shiseido has made large investments quickly and boldly,
including investments in M&A, research centers, new fac-
tories and marketing. The primary enabling factor is that
our Board of Directors, a majority of whom are indepen-
dent, external directors and external Audit & Supervisory
Board members, duly fulfill their monitoring functions of
reviewing and evaluating our strategies. We will continue
to evolve our corporate governance in line with global
standards to improve corporate value over the long term
and enhance its effectiveness.▶ See “Management Section, Corporate Governance” on pages
57-62 for details.
Moreover, I have reaffirmed the importance of
Shiseido’s more than 140-year heritage of tradition and
culture. It is the source of Shiseido’s originality, and our
businesses are recognized internationally for enhancing
cultural value. “Environment, society and governance”
(ESG) is an important aspect of long-term corporate
growth, but Shiseido will pursue a unique strategy in
which it emphasizes “environment, society, culture, and
governance,” or what we call ESCG, while working to
achieve sustainable growth.
We will also continue to develop our people and imple-
ment organizational reforms to compete successfully world-
wide. Enhancing diversity is particularly important for global
growth. Bringing together the diverse opinions of people
who vary in terms of nationality, gender, age and work expe-
rience is fundamental to a strong organization and to the
creation of value. In particular, I believe Shiseido should be
a leader in empowering women, which is a social issue in
Japan. Since 2016, female leaders account for more than
30 percent of management-level employees at Shiseido
Japan. We are currently empowering female leaders to
raise this number to 40 percent or higher by 2020.
A culture of repeated trial and error – an attitude of
“keep on trying” – has taken root among Shiseido
employees. We will devote ourselves to “One Shiseido”
while leveraging the unique features of the countries and
regions that we serve.▶ See “Engagement Agenda 2: Looking toward 2020,” page
45, for details.
We are absolutely committed to being a global winner
with our heritage. We will generate solid growth in every
region in 2020 and beyond by aligning brands loved by
people around the world with the ability to create
unprecedented value through innovation.
We invite you to share our enthusiasm for the future.
To Remain Vital for the Next 100 Years and Beyond
The CEO on Shiseido’s Management Strategy
22
Engagement Agenda 1
Region × Brand
2323
Region × BrandEngagement Agenda 1
Region × Brand Matrix Organization
Cosmetics
Personal care
Professional
Corporate/shared functions
Fragrance
Bra
nds
Prestige
Japan China AsiaPacific Americas EMEA Travel
Retail
Regions
Six Regional Headquarters and Our Global Management StructureThink Global, Act Local
In 2016, we launched the global man-
agement structure that is the key for
Shiseido to become a winner worldwide.
We have a matrix organization of five cate-
gories and six regions in which each
region has broad authority for marketing,
finance and other functions and responsi-
bility for sales and earnings. This approach
enables regionally relevant marketing
activities and flexible decisions, which
enhance our ability to respond to consumer
purchasing behavior and market changes.
Leaders Responsible for the Six Regions
❶ ❷ ❸ ❹❺
❼❻
❶ Kentaro Fujiwara, President, Shiseido China
❷ Jean-Philippe Charrier, President, Shiseido Asia Pacifi c
❸ Masahiko Uotani, Shiseido Group CEO
❹ Shigekazu Sugiyama, President, Shiseido Japan
❺ Philippe Lesné, President, Shiseido Travel Retail
❻ Marc Rey, President & CEO, Shiseido Americas
❼ Louis Desazars, President & CEO, Shiseido Group EMEA
24
EMEA
(¥110.0 billion)
+34%* China
AmericasJapan
Travel Retail
(¥132.0 billion)
+14%*
(¥391.0 billion)
+3%(¥164.0 billion)
+19%*
Asia Pacific
(¥48.5 billion)
+6%*
(¥32.5 billion)
+30%*
2017 Full-Year Forecast Year on Year (Local Currency Basis), Net Sales
(Announced on February 9, 2017)
Note: From the year ending December 2017, in line with organizational reform, reporting segments have been reviewed and recate-gorized as Japan, China, Asia Pacific, Americas, EMEA, Travel Retail, Professional and Other.
25
Achievements and Initiatives
In the year ended December 2016, the Japan Business
achieved its net sales target for the second consecutive year. Net
sales increased 2.9 percent year on year and operating income
increased 4.4 percent. We firmly established growth momentum
by fully committing to the implementation of the ICHIGAN Project,
which involves cross-divisional, consumer-oriented collaboration
among all employees, and by focusing on selection and concentra-
tion for marketing investments. We also successfully captured the
inbound demand of tourists visiting Japan, generating strong
growth for clé de peau BEAUTÉ in the prestige brand category.
SHISEIDO sales and market share also increased significantly,
driven by ULTIMUNE beauty serum. In addition, sales of ELIXIR,
MAQuillAGE and ANESSA increased in the cosmetics category, and
sales at cosmetics specialty stores also expanded.
However, sales in the personal care category decreased year
on year due in part to intensified competition, despite aggressive
marketing that included new product launches. We will implement
additional measures to address this key issue.
Strategies for the Future
Key themes for the Japan Business will be building growth
momentum to generate sustainable sales and income growth that
supports overall Group profitability. Moreover, our policies under
the new organization in place from 2017 are: concentrate on the
main businesses, change the main businesses, and be sure to
win and achieve milestones.
Concentrating on the main businesses involves always
thinking from the consumer’s perspective, and focusing in mind
and action on those businesses, in particular cosmetics. We will
Japan
Rigorous Selection and Concentration to Sustain Growth
Shigekazu SugiyamaPresident, Shiseido Japan
▶ Concentrate on the main businesses
▶ Change the main businesses
▶ Be sure to win and achieve milestones
Region × BrandEngagement Agenda 1
2016/12 Sales GrowthMomentum
2016/12 Sales by Business
Prestige4
Outperformed
Underperformed
Against the market growth rate:
Cosmetics
Personal Care
Prestige1
¥53.9 billion(+14.3%)
CosmeticsSpecialty Stores1
¥64.6 billion(+7.3%)
Cosmetics2
¥174.4 billion(+0.8%)
Personal Care2
¥58.3 billion(-4.1%)
Others3
¥56.5 billion(+3.0%)
Net Sales and Operating Income
(Billions of yen)2016/12 2015/12
(Adjusted)
Net sales 407.6 396.0
Operatingincome
57.4 55.0
Year-on-yearchange
+2.9%
+4.4%
Operatingpro�tability
12.6% 12.6% +0.0pt
Percentages in parentheses show year-on-year comparison
Notes: 1. The former Prestige business has been divided into “Prestige” and “Cosmetics Specialty Stores” in line with the management structure of Japan.
2. Three brands, AG+ (renamed AgDEO24 after the renewal), uno and MA CHÉRIE, were transferred from “Cosmetics” to “Personal Care” in the �rst quarter of the year ended December 2016. Results for the previous �scal year have been adjusted based on the post-transfer classi�cation.
3. “Others” include THE GINZA, SHISEIDO Professional, Frontier Science Business, and Shiseido Parlour and other businesses.
4. Including cosmetics specialty stores
26
carry out integrated marketing centered on our brands under the
ICHIGAN concept that unites marketing and sales functions.
Changing the main businesses means adapting to changes
in consumers and society. For example, we will increase invest-
ment in the digital marketing and e-commerce categories.
Furthermore, we will bolster skincare, base makeup and sun-
care, which are our strengths. With visitors to Japan on the
increase, we will also aggressively implement borderless market-
ing to capture inbound demand.
It is imperative that we rebuild the personal care category,
which continues to underperform. We will overhaul our strategies
for this category in areas including brand positioning, merchandis-
ing approach and sales organization. Points of sale are key for the
cosmetics and personal care categories, so we entered into a
strategic alliance in 2016 with Unicharm Corporation and Lion
Corporation to create more attractive sales displays. We started
such cooperative activities in 2017 with the goal of increasing
sales and productivity.
Being sure to win and achieve milestones means further
increasing market share and reclaiming our position as market leader.
We want to be the most appealing beauty company in Japan.
We will select and concentrate in the categories in which we can
steadily increase sales and profits. For the fiscal year ending
December 31, 2017 we forecast a 3 percent year on year
increase in sales to ¥391.0 billion.
SHISEIDO clé de peau BEAUTÉ
ANESSA
Store Sales of Major Brands in Japan Business:
2016/12 versus Previous Year
Prestige1
Cosmetics
Personal Care2
Better result than the previous year Poorer result than the previous year
Notes: 1. Including sales at cosmetics specialty stores 2. Shipments from wholesalers to retailers
Equivalent to the previous year
clé de peau BEAUTÉ
IPSA
ELIXIR
AQUALABEL
MAQuillAGE
INTEGRATE
ANESSA
HAKU
TSUBAKI SENKA SEA BREEZE
SHISEIDO BENEFIQUE
NARS
27
Achievements and Initiatives
The China Business generated strong growth in the pres-
tige category and e-commerce during the year ended December
2016. The results were significant: net sales increased 11.4
percent year on year and operating profitability increased 3.9
percentage points. Prestige category sales increased 33 per-
cent year on year as growth of SHISEIDO, clé de peau BEAUTÉ
and IPSA outstripped that of competing brands in the depart-
ment store channel. Moreover, e-commerce generated dramatic
growth of over 50 percent year on year, and expanded to 23
percent of total sales in China excluding Hong Kong.
In our cosmetics category, measures to restore sales
included installing new sales counters and expanding into new
channels to revitalize core brand AUPRES, and renewing
PURE&MILD products. However, this remains an area that
requires further work.
Strategies for the Future
We will further strengthen key categories and address those
in which issues remain.
In the rapidly developing e-commerce market, we will employ
a cross-channel strategy mainly targeting millennials to grow
focus brands. We will also build growth momentum by expanding
our e-commerce business through strategic partnerships with a
leading e-commerce website operator.
China
Building StrongGrowth Momentumby Overcoming Challenges
Kentaro FujiwaraPresident,Shiseido China
▶ Continue to strengthen the prestige category
▶ Restore growth potential in the cosmetics category
▶ Expand investment in the growing e-commerce and digital markets
Region × BrandEngagement Agenda 1
Net Sales and Operating Income Sales by Business Versus Previous Year
2015/12(Adjusted)
2016/12
2016/12 2015/12(Adjusted)
Net sales
Operatingincome
Year-on-yearchange
Operatingpro�tability
3.5% -0.4% +3.9pt
120.5 125.7
-4.2%
( )Localcurrency
basis +11.4%
4.2 -0.5 –
(Billions of yen)
Local currency basis
Prestige
Cosmetics
Personal CareOther
+10%
+17%
-1%
+33%
2015/12(Adjusted)
2016/12
28
ELIXIR advertising featuring a model popular in China
AUPRES sales counter clé de peau BEAUTÉ sales counter
In the cosmetics category, we will continue to increase invest-
ment in core brand AUPRES. We made further progress in rebrand-
ing initiatives launched in spring 2016 and have been executing a
series of full product renewals since March 2017 based on our
proprietary “Golden Circulation Theory,” which defines a healthy
and stable skin regeneration cycle. In the department store
channel, which remains challenging, we are closing unprofitable
counters. Nonetheless, we are targeting double-digit sales
growth by taking steps to accelerate our response to consumer
changes, such as opening brand shops in shopping malls, a
growing channel that is attracting a rising number of consumers.
In the prestige category, we will drive growth through ongoing
reinforcement with a focus on SHISEIDO, clé de peau BEAUTÉ and
IPSA and by implementing a borderless marketing strategy
throughout Asia.
An increasing number of consumers in China have a high
opinion of the quality of products that are made in Japan. Given
this market environment, we are positioning ELIXIR as a strategic
brand originating from Japan with a marketing approach attuned
to the lifestyles and preferences of Chinese consumers. We have
been opening ELIXIR brand shops in shopping malls since January
2017 and have launched the brand in e-commerce channels. We
will fully leverage digital marketing while communicating the value
of a quality brand originating from Japan.
As a result of these initiatives, for the year ending December
2017, we forecast a 14 percent year-on-year increase in sales
on a local currency basis to ¥132.0 billion. We are also target-
ing improved profitability by coordinating and strengthening
the functions of Chinese subsidiaries to increase productivity
and efficiency.
Store Sales by Brand
0
AUPRES
Za
clé de peau BEAUTÉ
SHISEIDO
ÉIPSA
Local currency basis
PURE&MILD
Net sales for FY2016
Year-on-year changein net sales
29
Achievements and Initiatives
During the year ended December 2016, the Americas
Business implemented various reforms to enhance profitability.
A major highlight of the year was our July acquisition of
Gurwitch Products, LLC., the owner of Laura Mercier, a solidly
established prestige makeup brand inspired by French aesthetics,
and RéVive, a prestige skincare brand. We are confident that this
acquisition will be a valuable asset in strengthening our brand
portfolio and increasing market share. In particular, the makeup
market has been growing remarkably in the Americas in recent
years, so we expect strong growth for Laura Mercier.
Structural reforms remained a priority at Bare Escentuals,
Inc., which accounts for about 40 percent of our sales in the
Americas and has had lingering issues for several years. We
transferred Bare Escentuals’ headquarters functions from San
Francisco to New York, where the Americas regional headquarters
is located, to raise the efficiency of our regional organization
through integration. Meanwhile, with our digital strategy as the
fulcrum we strengthened our prestige makeup brands throughout
the region. In addition, we began formulating global innovation
strategies for application in marketing worldwide with the launch
of our Makeup and Digital Marketing Centers of Excellence.
The Americas Business generated 8.0 percent year-on-year
sales growth for the year ended December 2016, but incurred an
operating loss because of aggressive marketing investment and
one-time costs for structural reform. Nonetheless, we are steadily
building the foundation for future earnings and expect a strong
recovery in profitability as we move forward.
Americas
Accelerating Sales Growth through Structural Reform and New Brand Additions to Build a Foundationfor Future Earnings
Marc ReyPresident & CEO, Shiseido Americas
Region × BrandEngagement Agenda 1
bareMinerals
2016/12 Sales GrowthMomentum
Prestige
Fragrance
Store Sales by Brand
Net sales for FY2016
Year-on-year changein net sales
clé de peau BEAUTÉLaura Mercier
bareMinerals
ZOTOS
SHISEIDO
FRAGRANCES
NARS
0
Outperformed
Underperformed
Against the market growth rate:
Local currency basis
Net Sales and Operating Income
* Year-on-year percentage change is +0% (local currency basis) excluding the effect of the acquisition of Laura Mercier.
(Billions of yen)2016/12 2015/12
(Adjusted)
Net sales
Operatingincome
Year-on-yearchange
Operatingpro�tability
-6.8% -3.1% -3.7pt
162.6 167.5
-11.8 -5.6 –
-3.0%
( )Localcurrency
basis +8.0%
30
Overview of Gurwitch Products, LLC.
BusinessesDistribution of cosmetics under the
Laura Mercier and RéVive brand names
Established 1995
Sales (year ended December 2015)
US$175 million
NARS sales counter
Laura Mercier
Strategies for the Future
The Americas Business will expand its growth potential by
implementing structural reforms of the bareMinerals brand and
by strengthening prestige brands with a focus on the makeup
category.
The bareMinerals brand is beginning to turn around due to
factors including the strong performance of GEN NUDE ,
BAREPRO and other newly launched products and increased digital
marketing. We also renewed the mainstay loose powder foundation
ORIGINAL in spring 2017. We intend to use our new manage-
ment structure to strengthen marketing, restore growth potential
and quickly regenerate brand earnings, with the goal of achieving
profitability after amortization of goodwill in the year ending
December 2018.
The integration of Laura Mercier with existing businesses is
progressing smoothly. We will increase marketing investment for
growth, and build sales in department stores and independent
specialty stores, which are the main channels for this brand.
In addition, the full-fledged operation of the regional head-
quarters system has enabled bold, rapid decision-making, and sig-
nificant benefits have begun to appear in our supply chain. We will
continue to improve profitability with haste, dramatically increasing
operational efficiency through such means as setting key
performance indicators and managing inventory based on a com-
mon region-wide management system.
As a result of these initiatives, with the addition of sales of
Laura Mercier, the Americas Business plans to achieve a 19 per-
cent year-on-year increase in net sales on a local currency basis
to ¥164.0 billion for the year ending December 2017.
▶ Restore growth for bareMinerals
▶ Strengthen prestige brands with a focus on the makeup category
▶ Improve efficiency andproductivity by reinforcing organizational capabilities
31
Achievements and Initiatives
During the year ended December 2016, the EMEA Business
strengthened marketing to further grow prestige brands including
SHISEIDO, narciso rodriguez and ISSEY MIYAKE. We also started a
license business in October 2016 for Italian luxury fashion brand
Dolce&Gabbana to expand market share in the fragrance category.
This business, a major step forward for us, is based on an exclusive
global license for the development, production and sale of fra-
grances, makeup and skincare products. We will create new value
by collaborating with this global fashion and beauty industry leader.
We have also integrated the fragrance and cosmetics busi-
nesses in each country, which had operated separately in our
region, to streamline back office operations and generate sales
synergies. As a result, we improved organizational efficiency and
increased our team unity in the spirit of “One Shiseido.”
Net sales of the EMEA Business decreased 8.1 percent year
on year on a local currency basis due to the termination of the
Jean Paul GAULTIER license agreement. However, excluding the
impact of Jean Paul GAULTIER and Dolce&Gabbana, for which
license activities began in October 2016, sales in real terms
increased 9.0 percent. Operating profitability decreased 12.3 per-
centage points year on year because of reduced marginal income
due to lower net sales, structural reforms associated with the
integration of regional organizations, and enhanced investment in
Dolce&Gabbana.
ISSEY MIYAKE
EMEA
Building the Foundation for Growth by Increasing Investment in Dolce&Gabbana
Louis DesazarsPresident & CEO, Shiseido Group EMEA
Region × BrandEngagement Agenda 1
2016/12 Sales GrowthMomentum
Prestige
Net Sales and Operating Income Store Sales by Fragrance Brand
Local currency basis
ISSEY MIYAKE
narciso rodriguez
ALAÏA
ELIE SAAB ZADIG & VOLTAIRE
0
Net sales for FY2016
Year-on-year changein net sales
Outperformed
Underperformed
Against the market growth rate:
Fragrance*
* Year-on-year percentage change is +9% (local currency basis) excluding the effect of the termination of the Jean Paul GAULTIER license and the acquisition of the Dolce&Gabbana license.
* Excluding impact of Jean Paul GAULTIER and Dolce&Gabbana
(Billions of yen)2016/12 2015/12
(Adjusted)
Net sales
Operatingincome
Year-on-yearchange
Operatingpro�tability
-8.1% 4.2% -12.3pt
85.2 104.2
-7.2 4.6 –
-18.2%
( )Localcurrency
basis -8.1%
32
Dolce&Gabbana
Overview of the Dolce&Gabbana License Agreement
Licensor Dolce&Gabbana S.r.l.
LicenseeBeauté Prestige International S.A. (at time of agreement)
License details
Covers the development, production and sale of Dolce&Gabbana brand fragrances and cosmetics
Start October 1, 2016
Overview of the Dolce&Gabbana Brand Cosmetics Business
Sales (year ended December 2015) Approximately EUR 400 million
Main sales channels
Depar tment stores, perfumeries, cosmetics specialty stores, duty-free shops and directly owned stores
narciso rodriguez
Strategies for the Future
For SHISEIDO, which continues to grow faster than the
market, we are targeting further growth through optimization by
concentrating on lines for reinforcement and selectively reducing
the number of products. We will also expand value globally by
building on our role as host region to the Fragrance Center of
Excellence.
We will boldly invest in advertising and other marketing
expenses to strengthen brand equity in our fully operational
Dolce&Gabbana business. At present, we plan to finish shifting
production to Shiseido factories during the first half of the
year ending December 2017 and to balance shipments and
investment in the second half, which will significantly improve
profitability. Building upon major upfront investment in the year
ending December 2017, we aim to restore the growth momentum
of the brand and put Dolce&Gabbana in the black from the year
ending December 2018. Over the medium term, in addition to
operations in Europe, we will leverage Shiseido’s global network
to strengthen sales of this brand in the Travel Retail Business,
Asia, China and elsewhere. In addition, we intend to accelerate
sales growth by using the Shiseido Group’s sophisticated
technological and product development capabilities to enhance
the product lineup and expand our fragrance, makeup and skin-
care lines.
We forecast that net sales in the EMEA Business will
increase 34 percent year on year on a local currency basis to
¥111.0 billion for the year ending December 2017 with full-year
sales of Dolce&Gabbana.
▶ Increase investment in Dolce&Gabbana to expand growth potential
▶ Make focused, selective investments in strong brands and product lines
▶ Improve profitability through organizational integration
33
Achievements and Initiatives/Strategies for the Future
In the Asia Pacific region, with the January 2016 transfer of
regional supervision and marketing functions to Singapore
from the head office in Japan, the regional headquarters became
fully operational. The increased authority of the regional head-
quarters has accelerated decision-making and reforms, with clear
results: net sales for the year ended December 31, 2016 increased
7.0 percent year on year with increases in every country in our
region. A highlight was the substantial growth in sales of prestige
brands SHISEIDO, clé de peau BEAUTÉ and NARS in South Korea,
Thailand and Vietnam. In addition, sales of SENKA, a personal
care brand originating from Japan, increased in South Korea and
Thailand because of energetic marketing geared to local consumer
needs.
Going forward, we will build momentum. We will fur ther
increase investment in the prestige category during the year ending
December 2017. We will also maintain localized marketing in the
cosmetics and personal care categories, and energetically market
brands from Japan that are highly trusted. We intend to work
together as a team with the aim of increasing net sales 6 percent
year on year on a local
currency basis to ¥48.5
billion in the year ending
December 2017.
2016/12 Sales GrowthMomentum
Net Sales and Operating Income
Prestige
Cosmetics
Personal Care
Against the market growth rate:
Outperformed
Underperformed
Against the market growth rate:
(Billions of yen)2016/12 2015/12
(Adjusted)
Net sales
Operatingincome
Year-on-yearchange
Operatingpro�tability
2.2% 0.8% +1.4pt
49.6 52.7
1.1 0.4 +171.8%
-5.9%
( )Localcurrency
basis +7.0%
▶ Strengthen the prestige category with aggressive investment
▶ Expand sales of brands from Japan
▶ Enhance regional headquarters functions
Region × BrandEngagement Agenda 1
Asia Pacific
Building Potent Brandswith Localized Marketing
Jean-Philippe CharrierPresident, Shiseido Asia Pacific
SENKA
SHISEIDO counter
34
Achievements and Initiatives/Strategies for the Future
The Travel Retail Business sells cosmetics in various chan-
nels including airport duty-free shops, and is Shiseido’s most prof-
itable business. For the year ended December 2016, net sales
increased 60.4 percent year on year, which was significantly higher
than the market growth rate, and operating profitability increased
8.1 percentage points to 22.1 percent. This performance was the
result of several factors. For example, we addressed the growing
number of tourists originating from Asia and elsewhere by increas-
ing the number of counters that sell brands including SHISEIDO
and clé de peau BEAUTÉ and by enhancing our service at existing
points of sale. We also strengthened advertising at airports and
proactively launched dedicated Travel Retail products. Other initia-
tives that supported our performance included conducting digitally
adept consumer-oriented marketing and developing relationships
with major retailers. Moreover, we see much room for growth given
that sales in Shiseido’s Travel Retail Business account for a smaller
total and proportion of net sales than they do at global competitors.
Shiseido will continue to invest aggressively in the Travel
Retail Business, which is one of its priority businesses. We fore-
cast that sales for the year ending December 2017 will increase
30 percent year on year on a local currency basis to ¥32.5 bil-
lion, driven by strengthened borderless marketing that includes
Japan and Asia and sales counter expansion and enhancement,
among other initiatives.
The goal of the Travel Retail Business is to make the world
beautiful. We will strengthen our organization in the spirit of “One
Shiseido” to drive Group growth.
FY2016 GrowthMomentum
Net Sales and Operating Income
Prestige
Outperformed
Underperformed
Against the market growth rate:
(Billions of yen)2016/12 2015/12
(Adjusted)
Net sales
Operatingincome
Year-on-yearchange
Operatingpro�tability
22.1% 14.0% +8.1pt
24.8 17.2
5.5 2.4 +126.8%
+44.2%
( )Localcurrency
basis +60.4%
▶ Increase the number of counters at airports worldwide
▶ Tailor marketing to the needs of travelers
▶ Develop dedicated travel retail products
Travel Retail
Accelerating Growth through Aggressive Investment Attuned to the Distinctive Needs of Tourists
Philippe LesnéPresident, Shiseido Travel Retail
35
Engagement Agenda 2
Looking toward2020 and Beyond
36
Looking toward 2020 and BeyondEngagement Agenda 2
A Message from the Executive Vice President
Trust is essential for companies to grow sustainably.
Shiseido has always been a sustainable company that
emphasizes trust and seeks to resolve social issues through
its operations. Indeed, Shiseido’s first president, Shinzo
Fukuhara, stated that companies sustain themselves and
grow if they have the trust of society, and that trust is an
important intangible asset.
Looking forward, we must continue to earn the trust of
constantly changing consumers and society. Through discus-
sions on our aspirations for 2020 through 2030 with employees
around the world, we have realized that we need to signifi-
cantly transform ourselves because of these changes, and
have committed to pursuing fundamental reforms.
We have undertaken the task of formulating and imple-
menting a sustainability strategy to create new business models
that positively influence the world while carefully observing
changes and risks relevant to consumers’ daily lives, the com-
munities we serve, and the environment in order to proactively
support all three. We have identified the three priority areas
of Person (Consumers), Community (Society), and Planet
(Environment) and wil l energetically work toward the
Sustainable Development Goals (SDGs) adopted by the
United Nations.
We must also revolutionize manufacturing to achieve
sustainable growth. We need to transform not only our prod-
ucts and services, but our product categories and our very
industry itself. This is our mindset as we execute initiatives
to bring together internal and external knowledge and people
under the key strategy of “fusion and innovation.” Innovation
should transcend the boundaries between regions and between
all facets of our operations, and come to life everywhere; in
stores, sales, manufacturing, research and so on. In fall 2016,
the h-CLAT test that we jointly developed with Kao Corporation
as an alternative to animal testing was adopted as an
Organization for Economic Co-operation and Development
(OECD) Test Guideline for evaluating the safety of chemicals.
This is an excellent example of how we are generating innova-
tion by going beyond the borders of the Company to bring
together knowledge and people for safe, reliable manufacturing.
Our ability to accomplish these initiatives depends on
how intently we focus on making consumers happy by drawing
on Shiseido’s corporate mission to “inspire a life of beauty
and culture” – in other words, by providing and sharing beauty.
To remain vital for the next 100 years and beyond, we will con-
stantly transform in all our businesses to contribute to con-
sumers and society as a global beauty company.
Totally committed to fulfilling our mission, we will carry ontransforming ourselves so that we continue to earn the trust of consumers and society one hundred years from now.
Representative Director,
Executive Vice President
Tsunehiko Iwai
37
The Shiseido Group’s Sustainability Strategy
Looking ahead to the next 100 years and beyond, the Shiseido Group intends to grow with society as a
global beauty company that stakeholders worldwide need and support.
It is critical to Shiseido’s sustainable growth to take proactive initiatives that resolve social and environ-
mental issues, particularly the Sustainable Development Goals (SGDs) adopted by the United Nations, and
realize a healthy society over the long term.
The Shiseido Group’s sustainability strategy is a growth strategy both for solving social and environmen-
tal problems and for business expansion. Our goal is to achieve a sustainable society that delights people
through beauty. In this society, sustainability is crucial for consumers, for the society to which they belong, and
for the global environment, which supports people’s lives. Our sustainability strategy therefore focuses on
three areas: Person (Consumers), Community (Society) and Planet (Environment).
For Person, our mission illuminates our desire to support people’s healthy, happy lives. For Community, we
will contribute to realizing a society that accepts diversities such as gender, age and nationality. For Planet, we
will promote sustainable product design and manufacturing to develop attractive products and services that go
beyond mere concern for environmental issues.
We will identify key issues from the viewpoints of impact on our businesses and society’s expectations,
align our activities with them and revise them regularly in accordance with changes in our society.
Sustainability Strategy Overview
Sustainability Strategy
Person (Consumers)
Community (Society)
Planet (Environment)
Supporting Healthy, Happy Lives
Contributing to Realizing a Society That Accepts Diversity
Sustainable Product Designand Manufacturing
Person (Consumers) Supporting Healthy Happy Lives
y gy
Person (Consumers) Supporting Healthy Happy Lives
ResolvingSocial and
EnvironmentalIssues
BusinessGrowth
Enhance & E
xpand ActivitiesM
ake
New
Bus
ines
s Opp
ortu
nities
Looking toward 2020 and BeyondEngagement Agenda 2
38
Priority Issues for Sustainability
Based on a proposal by the United Nations, the
SDGs are a set of 17 goals and 169 targets for realiz-
ing a sustainable world by 2030. They call upon all 193
countries in the United Nations to work hard to achieve
these goals.
Shiseido provides support for women’s empower-
ment and conducts a variety of other related initiatives.
For example, we announced our participation in the
United Nations Global Compact in September 2004 to
support its ten principles in four fields, and signed the
Women’s Empowerment Principles (WEPs) in September
2010. We will continue to strengthen our efforts to
achieve the SDGs.
We will develop people, respect human rights and transparently disclose information as important initiatives that support the Shiseido Group’s value chain.
Value chainExpectations of society
Research and
developmentMarketing
designProcurement Manufacturing
Distribution
and sales
UseWaste treatment
and recycling
Person
1 2 3 4 5
Community
Planet
Expectations for the contribution of our businesses
Appropriate information disclosure to consumersAppropriate information disclosure to consumersAdapting to a circular economyAdapting to a circular economy
Empowering women throughemployment and education
Empowering women throughemployment and education
Wastemanagement
Wastemanagement
Chemical substancemanagement
Chemical substancemanagement
Water and CO2 reductionWater and CO2 reduction
Preventing pollution from wastewaterPreventing pollution from wastewater
Providing safe, reliable productsProviding safe, reliable products
Empowering women through our businessesEmpowering women through our businessesZero natural forest destructionZero natural forest destruction
Responsible procurementResponsible procurement
Creating valuethrough innovation
Creating valuethrough innovation
Developing alternativemethods to animal
testing
Developing alternativemethods to animal
testing
Developing environmentallyfriendly packagingDeveloping environmentallyfriendly packaging
Universal designUniversal design
Developing countrybusinesses
Appearance careAppearance care
Fair tradeFair trade
Stable work environmentStable work environmentConserving energy at factoriesConserving energy at factories
Water conservationWater conservation
Conserving energy during distributionConserving energy during distribution
Developing low-carbontechnologiesDeveloping low-carbontechnologies
High-quality manufacturingHigh-quality manufacturing
Collaboration with the International Community for the SDGs and Other Initiatives
39
Supporting Healthy, Happy Lives
Contributing to Realizinga Society That AcceptsDiversity
Sustainable Product Design and Manufacturing
Person
Planet
Community
Examples of Main Initiatives
We mobilize our collective wisdom to provide
innovative products and services that fully lever-
age our sophisticated technological capabilities.
Moreover, we place the highest priority on quality
and safety so that consumers can use our prod-
ucts with peace of mind, and will proactively pro-
vide information on product safety.
Our aim is to be a lifelong partner of consum-
ers worldwide by helping them fulfill their desire
to live healthily and beautifully.
Shiseido believes that preserving the environ-
ment, which is intimately connected to people’s
lives, and promoting sustainable manufacturing,
are initiatives for passing on a beautiful planet to
the next generation. Our goal is to both grow our
businesses and minimize environmental impact in
our value chain not simply by addressing environ-
mental concerns, but also by adding new value that
impresses consumers. While providing attractive
products and services, we will also raise aware-
ness of and encourage consumer behavior that
does not harm the environment.
Aspirations in Three Areas
Shiseido Life Quality Makeup
Promoting Education on Gender Equality in Collaboration with UN Women
Use of Mechanically RecycledPolyethylene Terephthalate (PET)
The realization of a society that accepts differ-
ences in gender, age, nationality and other attributes
is an important and urgent issue. In this context,
Shiseido is focusing on the empowerment of women,
who are deeply significant to our business.
In collaboration with UN Women, a UN agency that
promotes gender equality and women’s empowerment,
we will promote education on gender equality for young
people. We will also support the independence of
women in developing countries through our business
activities. Fostering a corporate culture in which
employees accept each other’s differences is an impor-
tant task that leads to new value creation. As such, we
will continue to develop work environments in which
our employees can demonstrate their capabilities.
Looking toward 2020 and BeyondEngagement Agenda 2
40
Other Activities
SHISEIDO LIFE QUALITY BEAUTY SEMINARShttp://www.shiseidogroup.com/sustainability/seminar/
Promotion of Safe and Reliable Manufacturinghttp://www.shiseidogroup.com/sustainability/challenge/making/
Initiatives in Response to Animal Testing andAlternative Methodshttp://www.shiseidogroup.com/sustainability/challenge/experiment/
Providing information according to consumer life stage:Skin Care from Babyhoodhttp://www.shiseidogroup.com/bskincare/
Initiatives for the issue of palm oilhttp://www.shiseidogroup.com/sustainability/env/diversity.html#new121106
Camellia Planting and Conservation Activities on the Goto Islands in Nagasaki Prefecture, Where a Raw Material for TSUBAKI is Producedhttp://www.shiseidogroup.com/sustainability/env/diversity.html#new141128
Reduction of water usage by developing rinse-aid facial washSENKA Speedy Perfect Whip Airly Touchhttp://www.shiseidogroup.com/sustainability/env/goods/index.html#no099
Empowerment of Rural Bangladesh Womenhttp://www.shiseidogroup.com/sustainability/bop_empower/
Support for Empowerment of Women in Societyhttp://www.shiseidogroup.com/sustainability/support/
Initiatives to Realize a Rewarding Workplace Reviewing how employees work, eliminating long working hours, and increasing ways of working http://www.shiseidogroup.com/sustainability/labor/working.html
Diversity & Inclusion within the Company http://www.shiseidogroup.com/sustainability/labor/diversity.html
Shiseido Life Quality Makeup is a service in which Shiseido
provides free makeup advice, proposing cosmetics as a way to
resolve various skin problems such as blotches, dark spots, vit-
iligo, skin irregularities including scars and burn marks, and
side effects of cancer treatment such as dullness, other chang-
es in skin color and loss of eyebrows and eyelashes. We pro-
vide this service primarily at the Shiseido Life Quality Beauty
Center in Ginza, Tokyo as well as at approximately 380 business
partners and medical institutions throughout Japan and over-
seas in Shanghai, Hong Kong and Taiwan. These activities
improve quality of life and help to empower people to live as
they wish. Our aim is to achieve a happier society.
UN Women has launched the HeForShe gender equality
campaign with the belief that the active involvement of men is
indispensable for eradicating pronounced inequalities faced by
women and girls worldwide, including violence and discrimina-
tion. Shiseido supports this campaign, and will actively collabo-
rate with UN Women in promoting activities that raise aware-
ness of HeForShe within the Shiseido Group and externally. We
will also roll out gender equality education activities for the high
school and university students who will be society’s leaders in the
future.
Shiseido formulated its Production Eco Standards in 2010 to
serve as environmental standards for product design. In addition to
environmental friendliness, we have been emphasizing design and
ease of use. We focused on mechanically recycled PET* resin in
designing environmentally friendly containers. Unlike beverage bottles
for which mechanically recycled PET is already in use, cosmetics con-
tainers were difficult to make from this material because of their widely
varying thicknesses and shapes. However, we successfully developed
mass production technology that passed our stringent quality tests
after repeated trials. Shiseido began using mechanically recycled PET
resin for SEA BREEZE containers in September 2015. We will continue
to broaden the use of this material for product containers.
* High-purity, high-quality PET resin produced by using heat, vacuum and other processing to
decontaminate resin from PET bottles that have been sorted, flaked and washed
41
Looking toward 2020 and BeyondEngagement Agenda 2
日本
JapanEMEA
Americas
AsiaPacific
Fragrance
Japan
Skincare
AmericasEurope
p
Ski
China
Center of Excellence R&D Base Production Base
Makeup DigitalMarketing
p
Generating Innovation
Shiseido was founded as a Western-style pharmacy in 1872 and since then has created products backed
by science and technology. As we move forward, we are energetically promoting a global system for generat-
ing innovation to realize our corporate mission of inspiring a life of beauty and culture.
The Innovation Center in Japan acts as the hub for our research and development, and is primarily
responsible for basic research and for research in new categories. Other innovation centers around the world
are linked to this hub much like the spokes of a wheel. Through the close cooperation of each innovation
center within this hub-and-spoke network, we will transform the new technologies we create into optimal
value for consumers worldwide. In the year ended December 2016 we upgraded and expanded the Americas
Innovation Center and the Shanghai Branch of the China Innovation Center. Furthermore, in January 2017, we
established the Asia Pacific Innovation Center in Singapore to accurately respond to consumer needs in the
rapidly growing countries of Southeast Asia. We now have nine R&D bases in five countries and regions.
To nurture and strengthen our brands, we have also launched our Centers of Excellence (CoEs) in which
regions that significantly influence categories globally lead the Group in initiatives ranging from strategy-
building to developing products. Japan hosts the CoE for skincare, the Americas for makeup and digital marketing,
and Europe for fragrances. We will use CoE knowledge for brands and marketing in each country we serve. In
addition, we will strengthen collaboration among the innovation centers in our hub-and-spoke network, the
CoEs, and our three production bases in Japan and 10 production bases in five other countries and regions to
generate innovation globally through the convergence of knowledge.
▶ Shiseido’s Global Network
http://www.shiseidogroup.com/rd/network.html
A Global System for Generating Innovation
R&D and Production Bases
and Centers of Excellence
42
We are now constructing the Global Innovation Center (GIC), a new research center that will be the global
hub maximizing the R&D capabilities of our hub-and-spoke network. Scheduled to open at the end of 2018, GIC
is located in the Minato Mirai 21 area of Yokohama, Kanagawa Prefecture. GIC is an urban open lab that will
bring together diverse knowledge and people from organizations around the world – including advanced
research institutions and companies in other industries – to accelerate the creation of consumer-oriented value
and to create an “innovation ecosystem” that transcends national and industry borders.
The first and second floors of GIC will be an open communication space where consumers can be inspired by
beauty. The first floor will feature the Beauty Bar, where consumers can freely try out cosmetics, and the Active
Beauty Station for consumers who seek healthy and active beauty. The Deli & Café, which will offer a healthy
menu inspired by research into food and beauty, will also be located on the first floor. The second floor will feature
a museum, which will present Shiseido’s history along with the potential for beauty in the future. Researchers will
be engaged in planning and operation of these facilities to give them a tangible connection with contemporary
issues and market trends and to identify new research themes.
Urban Open Lab: A Hub for Innovation
“Innovation Ecosystem”
We intend to build an ecosystem at GIC that continuously generates innovation. Much like the ecological
systems on Earth that are natural environments made up of diverse elements, this “innovation ecosys-
tem” will be an analogous structure that brings together stakeholders including companies in other
industries, external research institutions, suppliers and consumers to achieve synergies that transcend
industry and national boundaries to create innovation.
The open communication area on the first
and second floors is produced by Kundo
Koyama (Orange and Partners Co., Ltd.)
and designed by Oki Sato (nendo Inc.).
Global Innovation Center
Location2-52 Takashima 1-chome, Nishi-ku, and ten additional parcels of land in 56-2, Minato Mirai 21 area, Yokohama
Facility overview 7,023m2
Site area16 floors above ground and 1 floor below ground (steel-framed reinforced concrete construction, total floor area of 58,231m2, building height of 76.91m)
Total cost ¥30–40 billion (estimate)
Image of the Global Innovation Center scheduled to open at the end of 2018
43
Shiseido will continue to strengthen basic research that supports its high-quality products and services.
We will also promote open innovation so that we can respond in a timely manner to consumer needs and a
market environment that are diversifying as technologies evolve and the social environment changes.
Specific Initiatives to Generate Innovation
Before use (4.75)
Before use (4.75)
Wrinkle Improvementwith New Retinol Product*
Representative example of wrinkle improvement with product containing active ingredient retinol. (53-year-old subject)
* Numbers in parentheses are wrinkle grade judgments
After 9 weeks (4.0)
After 9 weeks (4.5)
New product containing retinol
Product without retinol
In February 2017, the Japanese Ministry of Health, Labour
and Welfare approved Shiseido Retino Vital Cream V contain-
ing the active ingredient retinol as a quasi-drug for improving
wrinkles. We will begin introducing it through multiple brands.
Although the efficacy of skincare in improving wrinkles was
not recognized by the ministry for many years, Shiseido
proved that retinol improves deep wrinkles in accordance with
the guidelines established by the Japanese Cosmetic Science
Society. Shiseido is the only company that can manufacture
and sell wrinkle-improving products with the active ingredient
retinol in Japan, and will continue to advance anti-aging
research.
News Release
▶ http://www.shiseidogroup.com/news/detail.html?n=00000000002140
Recognition of Effect and Effi cacy of
New Active Ingredient Retinol in Improv-
ing Wrinkles for the First Time in Japan
Researchand
Development
Production
Shiseido is working to introduce automation at domestic
and overseas production and logistics bases to improve pro-
duction capacity and quality to support its sustainable growth.
We are developing humanoid robots that can perform complex,
intricate assembly processes for products such as makeup in
collaboration with people to achieve a new kind of manufactur-
ing suited to a high product mix and low production volumes.
We will expand the use of robots in tandem with technological
innovation and to cover future shortfalls in workers.
News Release
▶ http://www.shiseidogroup.com/news/detail.html?n=00000000002150
Manufacturing Reforms
Using Robots
Marketing
Shiseido has acquired U.S. venture MATCHCo., which
has developed direct marketing that enables consumers to
measure their own skin tones with a smartphone app and to
purchase custom-made foundation online that matches those
tones. We will combine MATCHCo.’s innovative digital technol-
ogies and knowledge in this area with our R&D capabilities to
enhance our business model by capturing the emerging trend
of cosmetics personalization.
News Release
▶ http://www.shiseidogroup.com/news/detail.html?n=00000000002114
Developing a New Business
Model through the Acquisition
of MATCHCo.
Looking toward 2020 and BeyondEngagement Agenda 2
44
Shiseido aims to be a company that is full of energy for growth and respected by the younger generations
around the world. We will achieve this by nurturing a large number of employees who create value for consum-
ers through innovation. By strengthening Shiseido through the capabilities of its people, we will create a win-
ning organization that will prevail over competitors. Our matrix organization is the foundation for developing
and deploying globally competitive people. We are focusing on fully leveraging the capabilities of our people
through an integrated process from hiring and selection to training and assignment.
Nurturing People and an Organization That Can Win Worldwide
We have formulated our BIG WIN 5 working principles to achieve VISION 2020 and our Organization and HR
Principles to define our aspirations for our organization and people. Extending beyond our approach to personnel
training, these principles apply to all of our human resource initiatives. We inspire our employees to take on the
challenge of being consumer-oriented in everything they do, and encourage them to lead by example.
China JapanGroup Headquarters
Americas
TravelRetail
EMEA
AsiaAPacific
Talent Development
•Identify key global positions
•Identify and acquire key people
•Accelerate global mobility
• Increase investments in training
– MBA program for young employees – Reinforcement of training program for nurturing management personnel – Launch of the Digital Academy for promoting the digital literacy of all employees – Launch of the Shiseido Leadership Academy
• Objective calibration
• Performance evaluation system that helps people set and achieve higher goals
• Manager’s support for subordinates’ growth
Establish and Execute Processes for Improving Performance Diversity and Inclusion
• Create new value by bringing together diverse employees
• Build an organization where employees have opportunities to excel regardless of gender, especially in Japan
Inspiremutual growth
All for consumers
Organization and HR PrinciplesBIG WIN 5
Shiseido will enhance our organizational capability especially in key professional skills and competencies, to lead creation of consumer values by converging both internal and external knowledge and skills.
Shiseido will encourage proactive individual growth anddevelopment by exploiting one’s full potential.
Shiseido will establish ambitious growth targets acrossall teams and will deliver its commitment.
Shiseido will inspire innovation through fusion and assimilation of diversity in cultures and values as a true global organization.
Shiseido will empower leaders who take actions and lead by example, and who encourage challenges of teams, by supporting them closely in order to respond to the change of the business environment.
Speak up, take action
Deliver your
commitment
Lead withintegrity
45
Engagement Agenda 3
Financial Strategy for Increasing Corporate Value over the Medium-to-Long Term
46
We will increase corporate value over the medium-to-long term through sustainable growth and by building a powerful management foundation.
The CFO on Shiseido’s Financial Strategy
Norio TadakawaCorporate Officer
Chief Financial Officer
During 2016, the second year of our three-year plan for rebuilding
our business foundation, we succeeded in breaking away from per-
sistent zero growth and successfully building growth momentum. The
reforms of the past two years for a turnaround in growth have had a
noticeable effect, and have enhanced our earning power. We will
steadily maintain our growth momentum by continuing to increase
investment. At the same time, we will emphasize ROI and increase
productivity to improve profitability. Through such initiatives we will
achieve our VISION 2020 targets of net sales of over ¥1 trillion,
operating income of over ¥100 billion, and ROE of 12 percent or higher,
and medium-to-long-term growth in corporate value.
Theme 1 Increased Investment
Aggressive Management That Achieves Sustainable Sales Growth As a result of our ability to consistently generate cash in our
core businesses, EBITDA for the year ended December 2016 was
¥90.1 billion. In the year ending December 2017, we will complete
the rebuilding of our business foundation and aggressively increase
investment in research and development, marketing and other areas
to achieve sustainable growth. Specifically, we will further increase
marketing investment to put newly added Laura Mercier and
Dolce&Gabbana brands on a growth track and focus on strengthening
prestige brands, which underpin our sales and continue to grow.
We will thus selectively concentrate investment on categories in
which we anticipate expansion to structure a potent brand portfolio
for sustainable growth.
Theme 2 Increasing Productivity
Autonomous Management by Regional Headquarters for Sales Growth and Improved Profitability Shiseido is improving brand ROI and implementing other initia-
tives to enhance productivity with the goal of operating profitability of
10 percent or higher for all regional headquarters by 2020. We will
bolster core businesses with M&A and alliances, and improve profit-
ability by boldly reorganizing our business portfolio in ways such as
divesting unprofitable and non-core businesses. In addition, we will
improve productivity by substantially reducing inefficient SKUs,*
rationalizing back office operations, and raising brand ROI.
Cost structure reform will generate capital for investment. We will
achieve cost reductions of ¥30 to ¥40 billion in the year ending
December 2017 compared with the year ended March 2015 as we
step up initiatives to improve our profit structure worldwide.
We will also enhance cash management to support aggressive
investment and share timely information about operating conditions
worldwide to flexibly reallocate investment to successful categories. This
will enable us to maximize returns by adapting quickly to market change.
* Stock keeping unit: The smallest distinct item in inventory management
Theme 3 Financial Strategy
Increasing Capital Efficiency Premised on an Optimum Capital Structure Our financial strategy focuses on increasing ROE, which will
guide us in optimizing our capital structure, determining our dividend
policy, establishing investment criteria and configuring capital cost.
Our shareholder return policy targets total returns, comprising direct
returns to shareholders through dividends and medium-to-long-term
share price gains. Given this mindset, our objective is to increase
profits and improve capital efficiency by driving growth through strategic
investment, which will increase dividends and our share price over
the medium-to-long term. We will continue to enhance shareholder
returns while taking into consideration the market environment, free
cash flow and investments for growth, including M&A. In addition, we
will conduct timely funding by the optimum method based on factors
including capital cost, operating trends, our financial condition and the
market environment.
Financial Strategy for Increasing Corporate Value over the Medium-to-Long TermEngagement Agenda 3
Impact of Brand Acquisitions and License Contracts on the Balance Sheet
* Earnings before interest, tax, depreciation and amortization = Income (loss) before income taxes + Interest expense + Depreciation and amortization + Impairment loss on goodwill and other intangible assets
0
25
50
75
10091.3
29.6
2014/3
30.6
90.7
2015/3
56.5
90.1
2016/12
90.0+
57.9
2017/12(Plan)
33.9
80.6
2015/12
EBITDA* Capital investment
Intangible assets and
shares of subsidiaries, etc.
Investment for Growth and Selection and Concentration
2016/12
Total assets ¥946.0 billion
Total assets ¥808.5 billion
2015/12
Interest-bearing
debt ratio*
Intangibleassets
22.6%
¥246.3billion
Intangibleassets
¥161.4billion
Interest-bearing
debt ratio
17.3%
● Intangible assetsIntangible assets at December 31, 2016 were ¥246.3 billion, an increase of ¥84.9 billion compared with December 31, 2015.
Future excess earnings expected from Laura Mercier and RéVive are recognized as goodwill and trademarks.
Future payments related to Dolce&Gabbana trademarks are recognized as both intangible assets and liabilities.
● Interest-bearing debtShiseido funded the brand acquisition and licensing agreement with corporate bonds and bank borrowings, and recognized future payments related to trademarks in liabilities as long-term payables. As a result, interest-bearing debt (including long-term payables) increased ¥89.2 billion compared with December 31, 2015.
* The interest-bearing debt ratio was 29.8% including long-term payables associated
with Dolce&Gabbana.
Theme 1 Increased Investment – Aggressive Management That Achieves Sustainable Growth
Change
¥84.9 billion
Change
+5.3pt
M&A, Licensing and Collaboration for Growth Business Divestitures, Alliances and Exit from Unprofitable Businesses
● Our abilit y to consistently generate cash has
improved. We forecast that EBITDA will be higher
than ¥90.0 billion for the year ending December
2017.
● Capital investment exceeded ¥100.0 billion for
the year ended December 2016 largely due to
investment of ¥56.5 billion in the Global Innovation
Center and the new Osaka Factory, shares of subsid-
iaries mainly resulting from the acquisition of Laura Mercier, and intangible assets related to the licens-
ing agreement for Dolce&Gabbana.
● In the year ending December 2017, we will aggres-
sively increase investment in brands, mainly pres-
tige, that are made in Japan, in digital marketing,
e-commerce, and other growth fields, in addition to
continuing investment to generate long-term growth.
July 2016
Acquisition of Laura Mercier and RéVive
June 2015
Sale of Ayura Laboratories Inc. and related assets
July 2015
Greece: Sale of subsidiary
December 2015
Turkey: Sale of subsidiary
Cash Generation and Aggressive InvestmentEBITDA and Capital Investment
(Billions of yen)
December 2016
Established Shiseido Venture Partners and invested in dricos, Inc.
October 2016
Start of Dolce&Gabbana licensing business
January 2017
Acquisition of MATCHCo.
Enhanced business and brand portfolio Divestitures and alliances
November 2015
India: Termination of Za brand sales and dissolution of
subsidiary
Exit from unprofitable businesses
New business models for beauty; digital technology acquisition
Main Themes in Detail
Financial Strategy for Increasing Corporate Value over the Medium-to-Long TermEngagement Agenda 3
48
Cost Structure Reforms More Successful Than PlannedCost Structure Reforms and Outcomes
Outer circle:2016/12
Inner circle:2015/12
Exited unprofitable businesses
(Greece, Turkey and elsewhere)
Consolidated raw
material purchasing
Raised supply
chain efficiency
Optimized product specifications
(Reviewed materials part by part)
Strategic purchasing activities
Enhanced process
for controlling cost of sales
Promotional item selection
and concentration
Global purchasing
Shared services
System integration and consolidation
Shifted to outsourcing
Reduced waste of promotional items
Strict competition
for promotional item purchasing
Reviewed lease contracts
Strengthened supplier negotiations
Outsourced logistics
Impact of coststructure reforms
2016/12:¥14.5 billion
Targeting Consolidated Operating Profitability of 10 PercentOperating profitability targets and initiatives in each segment
* Operating profitability for the Americas and EMEA before amortization of goodwill, etc.
2016/12operating
profitability
2020/12operating
profitability (goal)Initiatives and policies toward year endingDecember 2020
2016/12operating
profitability
2020/12operating
profitability (goal)Initiatives and policies toward year endingDecember 2020
Japan
China
Energetically nurture key brands
and increase ROI
Selection, concentration and
reduction of product variations
Sales strategy for expanding
brand contact points with
consumers
Shift to a digitally adept
business model
Strengthen functional coordina-
tion among subsidiaries and
enhance efficiency
Energetically leverage Japanese
quality and brands made in Japan
Expand sales with localized
marketing
Energetically leverage Japanese
quality and brands made in Japan
Strengthen regional headquar-
ters functions
Asia Pacific
15%+
12.6%
10%+
3.5%
10%+
2.2%
Americas
EMEA
Achieve growth turnaround and
improve profitability at Bare
Escentuals Inc.
Increase sales and raise
productivity by enhancing
organizational capabilities
Expand makeup brand growth
and ROI using digital approaches
Increase ROI by escalating
growth in fragrances and by
enhancing brand power
Raise productivity with
organizational integration
Fully develop operations in the
United Kingdom, the Middle
East, and elsewhere
Aggressively expand brands and
sales counters, and increase
investment
Further enhance organizational
and marketing capabilities
Travel Retail
-6.8%
(-7.0%)*
(-1.7%)*
22.1% 20%+
-8.1%
Theme 2 Increasing Productivity – Autonomous Management by Regional Headquarters for Sales Growth and Improved Profitability
2015/12 2016/12 2017/12
(Plan)
2015/12
to 2017/12
3-year total
60+
30- 40
7.5
22
14.5
8.5+
10%+*
10%+*
(2015/12:¥7.5 billion)
(Billions of yen)
China
Japan
AmericasEMEA
7.5
22
30-40
49
Capital Structure and ROE
Capital Allocation Approach for Three-Year Business
Foundation Rebuilding (2015 through 2017)
Dividends per Share and Payout Ratio
20.0 20.0 20.0 20.0 20.0
30.5
0
20
40
30
10
0
20
10
40(%)(Yen)
(Billions of yen) (%)
24.9
34.4
23.7
Payout ratio (Right scale)
2015/122015/3 2016/122014/3
2015/122015/3 2016/122014/3
2017/12(Forecast)
8.4 9.4
6.0
8.2
● During the three years ending December 2017, we have been rebuilding our business founda-tion and prioritizing investments to achieve sustainable growth and to enhance our ability to generate cash.
● We will allocate a portion of increased earnings to dividends when earnings directly associated with businesses exceed the yearly plan and we do not make additional investments for growth.
Cash Generation
Cash provided by sale of businesses, etc. Cash used in investments
for sustainable growth
Reduction of interest-bearing debt
Shareholder returns
Cash provided by operations
● The target medium-term consolidated dividend payout ratio is 40 percent.
The payout ratio for the year ended December 2016 was almost 40 percent (Shiseido esti-mate: 39.8 percent) when calculated using net income before extraordinary items including gain on sales of property, plant and equipment (including the sale of the former Kamakura Factory site).
The average payout ratio for the most recent three years (year ended March 2015, period ended December 2015 and year ended December 2016) is 42.4 percent (before items including gain on transfer of business).
● We will emphasize stable cash dividends and buy back shares flexibly.
155.9106.9 86.6
120.61
338.6386.9 391.7 393.0
0
150
300
450
750
600
0
5
10
Notes: 1. Interest-bearing debt including long-term payables associated with Dolce&Gabbana is ¥175.8 billion. 2. Equity = Total net assets − Stock acquisition rights − Non-controlling interests in consolidated subsidiaries
Interest-bearing debt (Left scale)
Dividends per share (Left scale)
Equity2 (Left scale) ROE (Right scale)
Theme 3 Financial Strategy – Increasing Capital Efficiency Premised on an Optimum Capital Structure
30
● The five-year average ROE is 8.0 percent** Calculated based on an adjusted ROE of 7.6 percent for the
period ended December 2015 and a forecasted ROE of 6.5 percentage for the year ending December 2017
We expedited addressing and resolving legacy issues, and recognized restructuring expenses for upfront investment.
● We will maintain an A rating to enable favor-able funding.
Moody’s S&P
Long-term A2 A- (Outlook: Stable) (Outlook: Stable)
Short-term P−1 A−2
● T he t a r ge t in te res t - bea r ing deb t r a t io is 25 percent.
Shiseido meets its funding requirements for large-scale investments using optimum, t imely methods given factors including operating status, financial position and market environment.
30.7
(As of February 28, 2017)Credit Rating
Financial Strategy for Increasing Corporate Value over the Medium-to-Long TermEngagement Agenda 3
50
52 Directors, Audit & Supervisory Board Members and Corporate Officers
56 A Message from an External Director
57 Corporate Governance
ManagementSection
51
Representative Director, President and CEO Representative Director, Executive Vice President
Assisting CEOChief Technology and Innovation Officer Chief Quality OfficerResponsible for Legal and Governance, Compliance
(As of May 1, 2017)1
❶❼ ❺ ❸❹❻
Management Section
❶ Masahiko Uotani (Date of birth: June 2, 1954)
Chairman of the Board Responsible for Japan Region, China Region, Asia Pacific Region, Americas Region, Europe, Middle East and Africa Region, Travel RetailDirect reporting organizations: Corporate Strategy, Innovation Design Lab., Global Prestige Brands
1977 Joined the Lion Dentifrice Co., Ltd. (currently
Lion Corporation)
1988 Manager, Citibank, N.A.
1991 Representative Director, Vice President of Kraft
Japan Limited (currently Mondelez Japan
Limited)
1994 Director, Executive Vice President and Chief
Officer of Marketing of Coca-Cola (Japan) Co., Ltd.
2001 Representative Director, President of Coca-Cola
(Japan) Co., Ltd. (Global Officer)
2006 Representative Director, Chairman of Coca-Cola
(Japan) Co., Ltd.
2007 Representative Director, Chief Executive Partner
of BrandVision Inc.
2011 Outside Director of ASKUL Corporation
2012 Director of Citibank Japan Ltd. (part-time)
2013 Outside Chief Marketing Advisor of Shiseido
2014 President and CEO [incumbent]
Chairman of CSR Committee
Representative Director [incumbent]
2015 Responsible for Human Resources,
Corporate Culture Reforms
Responsible for Global Business (International
Business, China Business, Professional Business)
Chief Officer of International Business Division
Responsible for Global Business
Responsible for Corporate Communication
2016 Responsible for Corporate Strategy, Internal
Audit, Global Cosmetics, Personal Care Brands
2017 Responsible for Japan Region, China Region,
Asia Pacific Region, Americas Region, Europe,
Middle East and Africa Region, Travel Retail
[incumbent]
Direct reporting organizations: Corporate
Strategy, Innovation Design Lab., Global
Prestige Brands [incumbent]
❷ Tsunehiko Iwai (Date of birth: May 28, 1953)
1979 Joined Shiseido
2002 General Manager of Product Commercialization
Planning Department
2004 Chief Officer of Fine Chemical Division
2006 General Manager of Technical Department
2008 Corporate Officer
2009 General Manager of Quality Management
Department
2010 Responsible for Technical Planning, Quality
Management, Frontier Science Business
2013 Responsible for Technical Planning, Quality
Management, Pharmaceutical Affairs, CSR,
Environmental Affairs, Frontier Science Business
2014 Corporate Executive Officer
Responsible for Research & Development,
Production, Technical Affairs
Director
2015 Chief Technology and Innovation Officer [incumbent]
Responsible for Research and Development, SCM,
Technical Strategy
Chief Technical Strategy Officer and Chief Quality
Officer
Directors, Audit & SupervisoryBoard Members and Corporate Officers
52
12
1980 Joined Maki and Associates
1991 Joined McKinsey & Company Inc. Japan Office
Associate Consultant
1993 Engagement Manager of McKinsey & Company Inc.
Japan Office
1995 Senior Engagement Manager of McKinsey &
Company Inc. Japan Office
1999 CEO of BNP Paribas Cardif Japan
2011 Head of International Human Resources of BNP
Paribas Cardif (in France)
2014 Corporate Advisor of Shiseido
2015 Department Director, Human Resources
Department
Responsible for Human Resources, Corporate
Culture Reforms
Corporate Officer
Chief People Officer, Department Director,
Human Resources Department [incumbent]
2016 Responsible for China Business Innovation Project
[incumbent]
Responsible for Executive and External Relations
Chairman of Shiseido Liyuan Cosmetics Co., Ltd.
[incumbent]
2017 Corporate Executive Officer [incumbent]
Chief Creative Officer [incumbent]
Responsible for Advertising and Design
[incumbent]
Director [incumbent]
External Director2
❸ Jun Aoki (Date of birth: April 30, 1957)
Chief People Officer Chief Creative Officer Responsible for Human Resources, Advertising and Design, China Business Innovation Project
Director, Corporate Executive Officer
Notes: 1. External directors and external Audit & Supervisory Board members are as of December 31, 2016.
2. Independent Director provided in Rule 436-2 of the Tokyo Stock Exchange Securities Listing Regulations
11❾❷ 10 ❽
Responsible for Technical Planning, Quality
Management, Frontier Science Business
Responsible for Pharmaceutical Affairs
2016 Representative Director [incumbent]
Executive Vice President [incumbent]
Responsible for Research and Development, SCM,
Technical Strategy
Responsible for Regulatory Strategy
Responsible for Legal and Governance, Compliance
[incumbent]
Responsible for Sustainability Strategy
Chairman of Compliance Committee [incumbent]
2017 Assisting CEO [incumbent]
Chief Technology and Innovation Officer [incumbent]
Chief Quality Officer [incumbent]
Responsible for Sustainability Strategy, Executive
and External Relations [incumbent]
Direct reporting organizations: Corporate
Communications, Corporate Culture, Internal Audit,
Technical Strategy, Regulatory Strategy, Quality
Strategy [incumbent]
Responsible for Innovation for Value Creation Project
❹ Yoko Ishikura (Date of birth: March 19, 1949)
1985 Joined McKinsey & Company Inc. Japan Office
1992 Professor, School of International Politics,
Economics and Communication, Aoyama Gakuin
University
1996 Director (part-time), Avon Products Inc.
2000 Professor, Graduate School of International Corporate
Strategy, Hitotsubashi University
2001 Member of the Central Education Council
2004 Director (part-time), Vodafone Holdings K.K.
Outside Director (part-time) of Japan Post
2005 Vice President, the Science Council of Japan
2006 Outside Director, Mitsui O.S.K. Lines, Ltd.
2008 Member (part-time) of the Council for Science and
Technology Policy
2010 Outside Director, Nissin Food Holdings Co., Ltd.
[incumbent]
Outside Director, Fujitsu Limited
2011 Professor, Graduate School of Media Design,
Keio University
2012 Professor Emeritus, Hitotsubashi University
[incumbent]
Outside Director, Lifenet Insurance Company
2014 Outside Director, Sojitz Corporation [incumbent]
2015 External Director of Shiseido [incumbent]
Sustainability Strategy, Executive and External Relations Direct reporting organizations: Corporate Communications, Corporate Culture, Internal Audit, Technical Strategy, Regulatory Strategy, Quality Strategy
53
• External Audit & Supervisory Board member retired as of March 28, 2017: Akio Harada
* Independent Director/Audit & Supervisory Board Member provided in Rule 436-2 of the Tokyo Stock Exchange Securities Listing Regulations
❺ Shoichiro Iwata (Date of birth: August 14, 1950)
Chairman of Remuneration Advisory Committee
External Director*
1973 Joined Lion Fat and Oil Co., Ltd. (currently Lion Corporation)
1986 Joined Plus CorporationDeputy General Manager of Product Development Division
1992 Head of ASKUL Business Project, Sales Division of Plus Corporation
1995 Manager of ASKUL Business Division, Plus Corporation
1997 President of ASKUL Corporation [incumbent]
2000 CEO of ASKUL Corporation [incumbent]
2006 External Director of Shiseido [incumbent]Chairman of Remuneration Advisory Committee [incumbent]
2015 External Director of Minnano Wedding Co., Ltd. [incumbent]
❼ Tatsuo Uemura (Date of birth: April 19, 1948)
Chairman of Nomination Advisory Committee
External Director*
1977 Lecturer, Faculty of Law, The University of Kitakyushu
1979 Associate Professor, Faculty of Law, The University of Kitakyushu
1981 Associate Professor, School of Law, Senshu University
1986 Professor, School of Law, Senshu University
1990 Professor, College of Law and Politics, Rikkyo University
1997 Professor, School of Law, Waseda University
2003 Director, Center of Excellence - Waseda Institute for Corporation Law and Society Professor, Waseda Law School
2004 External Director, Jasdaq Securities Exchange, Inc.
Professor, Faculty of Law, Waseda University [incumbent]1
2006 External Director of Shiseido [incumbent] Chairman of Nomination Advisory Committee [incumbent]
Dean of Faculty of Law and the School of Law, Waseda University
2008 Director, Global Center of Excellence - Waseda Institute for Corporation Law and Society [incumbent]
2012 Member of the Board of Governors of Japan Broadcasting Corporation (NHK) Auditor of the Audit Committee of NHK
2013 Acting Chairman of the Board of Governors of NHK
10 Nobuo Otsuka (Date of birth: January 10, 1942)
External Audit & Supervisory Board Member*
1988 President and Director of Keiseikai Hospital
2007 External Audit & Supervisory Board Member of Shiseido [incumbent]
2010 Chairman of Keiseikai Hospital [incumbent]
❽ Yoshinori Nishimura (Date of birth: June 28, 1955)
Audit & Supervisory Board Member
1979 Joined Shiseido
2005 General Manager of Financial Department
2008 General Manager of Corporate Planning Department Group Leader of Finance Strategy Group and
General Manager of Financial Department of Shiseido Business Solutions Co., Ltd.
2009 President of Shiseido Deutschland GmbH
2011 Corporate Officer, Chief Financial OfficerResponsible for Finance, Investor Relations, Information System Planning
Responsible for Internal Control
2012 Director
2014 Audit & Supervisory Board Member (standing) [incumbent]
❾ Kyoko Okada (Date of birth: July 26, 1959)
Audit & Supervisory Board Member
1982 Joined Shiseido
2003 Professional Business Operations Division
2004 Corporate Social Responsibility Department
2006 Corporate Culture Department
2011 General Manager of Corporate Culture Department
2012 General Manager of Corporate Culture Department and Group Leader for the 150-Year History Compilation Project
2015 General Manager, Executive Section, General Affairs DepartmentAudit & Supervisory Board Member (standing) [incumbent]
Management Section
❻ Kanoko Oishi (Date of birth: March 24, 1961)
External Director*
1983 Joined Nippon Life Insurance Company
1987 McKinsey & Company, Inc. (New York Office)
1988 McKinsey & Company, Inc. (Tokyo Office)
2000 CEO, Mediva Inc. [incumbent]
CEO, Seinan MEDIVA Co., Ltd. (Currently Seeds 1 Co., Ltd.) [incumbent]
2001 Outside Auditor, ASKUL Corporation
2002 Outside Director, ASKUL Corporation
2010 Outside Director, Astellas Pharma Inc.
2015 Outside Director, Ezaki Glico Co., Ltd. [incumbent]
External Board Member, Santen Pharmaceutical Co., Ltd. [incumbent]
External Director, Suruga Bank Ltd. [incumbent]
2016 External Director of Shiseido [incumbent]
12 Eiko Tsujiyama (Date of birth: December 11, 1947)
External Audit & Supervisory Board Member*
2003 Professor, School of Commerce and the Graduate School of Commerce, Waseda University
2004 Professor, Faculty of Commerce, Waseda University [incumbent]
2008 Outside Audit & Supervisory Board Member of Mitsubishi Corporation
2010 Outside Director of ORIX Corporation
Dean of the Graduate School of Commerce, Waseda University
2011 Outside Corporate Auditor of LAWSON, INC. [incumbent]
Outside Audit & Supervisory Board Member of NTT DOCOMO, INC. [incumbent]
2012 External Audit & Supervisory Board Member of Shiseido [incumbent]
1974 Public prosecutor, Tokyo District Public Prosecutors Office
2001 Chief Prosecutor, Saga District Public Prosecutors Office
2002 Public prosecutor, Supreme Public Prosecutors Office
2004 Director-General of the Secretariat of the Minister, Ministry of Justice
2006 Director-General of the Criminal Affairs Bureau, Ministry of Justice
2007 Vice-Minister of Justice, Ministry of Justice
2009 Superintending Prosecutor, Sapporo High Public Prosecutors Office
2010 Deputy Prosecutor General, Supreme Public Prosecutors Office
11 Hiroshi Ozu (Date of birth: July 21, 1949)
External Audit & Supervisory Board Member*
2011 Superintending Prosecutor, Tokyo High Public Prosecutors Office
2012 Prosecutor General, Supreme Public Prosecutors Office
2014 Registered as attorney
2015 External Audit & Supervisory Board Member, MITSUI & CO., LTD. [incumbent]Outside Audit & Supervisory Board Member, TOYOTA MOTOR CORPORATION [incumbent]
2016 Representative Director, Shimizu Scholarship Foundation, general incorporated foundations [incumbent]
2017 External Audit & Supervisory Board Member of Shiseido [incumbent]
54
取締役を兼務しない執行役員Corporate Officers Who Do Not Serve as Director
Yoichi ShimataniCorporate Executive Officer
Chief Research and Development Officer
Responsible for R&D Administration, Cosmetics R&D, Cosmetics Value Development,
Intellectual Property, Basic Research, Life Science Research, Quality Assessment
Shigekazu SugiyamaCorporate Executive Officer
Responsible for Japan Region
Representative Director, President, Shiseido Japan Co., Ltd.
Jean-Philippe CharrierResponsible for Asia Pacific Region
President, Shiseido Asia Pacific Pte. Ltd.
Kentaro FujiwaraResponsible for China Region
Chairman and President, Shiseido China Co., Ltd.
Katharina HöhneSenior Vice President, Global Professional Business
Masaya HosakaChief Supply Chain Officer
Responsible for SCM, Production, Technology and Engineering, Purchasing, Factories,
Frontier Science Business
Mitsuru KameyamaChief Information Officer
Responsible for Global Information and Communication Technology Department
Yasushi KushidaAssisting Chief Technology and Innovation Officer
Responsible for Special Mission Projects
Yoshiaki OkabeBrand Director, SHISEIDO Brand Unit,
Global Prestige Brands
Yoshihiro ShiojimaChief Legal and Governance Officer
Responsible for Legal and Governance, Compliance, Sustainability Strategy, Executive
and External Relations
Mikiko SoejimaChief Beauty Officer
Responsible for Beauty Creation
Chief Beauty Officer, Shiseido Japan Co., Ltd.
Responsible for Beauty Consultant Representative, Beauty Consultation Planning,
Consumer Information, Shiseido Japan Co., Ltd.
Norio TadakawaChief Finance Officer
Responsible for Finance, Financial Management, Investor Relations,
Business Development
• Corporate officer retired as of December 31, 2016:
Takahiro Hayashi
• Corporate officer retired as of April 30, 2017:
Mari Tamura
55
I became a Shiseido external director three years ago.
I participate in Board of Directors, new year Group policy
kickoff and various other meetings and also spend a sub-
stantial amount of time working with front-line employees,
so I see that Shiseido is changing significantly.
Shiseido’s corporate governance is also at the fore-
front among corporations in Japan, and continues to evolve.
Shiseido makes decisions with exceptional speed, which
I largely attribute to CEO Masahiko Uotani’s excellent leader-
ship. The acquisition of the Dolce&Gabbana license is
representative. Multiple investment projects were in prog-
ress at the same time, including the acquisition of Laura
Mercier. Mr. Uotani addressed this situation by e-mailing
detailed reports on up-to-the-moment changes in progress to
all attendees of Board of Directors meetings, including exter-
nal directors and Audit & Supervisory Board members. The
speed, accuracy and timeliness of these reports allowed suf-
ficient discussion among external directors. Japanese com-
panies tended to emphasize formulaic governance for a while
in response to the estab l ishment of the Corporate
Governance Code, but companies need to grow. Shiseido rec-
ognizes that to achieve growth, corporate governance must
be predicated on maintaining established frameworks and
transparency to create an environment that lets management
make bold moves quickly according to the circumstances.
Ongoing reform is critical for Shiseido’s future. It may be
challenging, but Shiseido must accelerate innovation and
investment to maintain momentum. Hiring and nurturing
people is key to reform and growth. More talented people
than ever will come to Shiseido from around the world if
Shiseido creates an environment in which employees can
demonstrate their true abilities. I strongly believe that this
will truly make Shiseido a company with highly valuable people.
Shiseido is a vibrant company that is drawing on its
traditions and clear vision under solid leadership to take
on numerous challenges. I am confident that with trans-
parent and bold management, Shiseido will earn interna-
tional respect as a global beauty company from Japan.
A Message from an External Director
Sharing information with
haste and transparency
will drive Shiseido’s
reforms and growth
External Director
Yoko Ishikura
Management Section
56
External ExternalInternal Internal
Percentage of external directors and Audit & Supervisory
Board members
58%
33%
Percentage offemale directors
and Audit &Supervisory Board
members
7 directors 5 Audit & Supervisory Board members
Independent external directorsIndependent external Audit &Supervisory Board members
Full-time Audit &Supervisory Board
members(from inside the
Company)
Frominside
theCompany
Long careersoutside of Shiseido
RepresentativeDirector
RepresentativeDirector
RepresentativeDirector
RepresentativeDirector
Corporate Governance
The Shiseido Group defines corporate governance as its “plat-
form to realize sustainable growth by fulfilling its corporate mission,”
and is enhancing corporate governance to achieve the objectives of
its medium-to-long-term strategy, VISION 2020. We have been fully
committed to the evolution of corporate governance since 2001,
and the ongoing reforms to date can be divided into three stages.
The first stage initiated corporate governance reform. Initiatives
to separate the functions of management supervision and execution
included the introduction of the corporate officer system. At the
second stage, we implemented many initiatives for creating the
framework of our corporate governance such as the establishment
of the Nomination Advisory Committee and the appointment of
external directors. In this way, we have set out objective quantitative
and pro forma standards. We enhanced the quality of corporate
governance by rigorously employing this framework and disclosing
the outcomes. We have now begun the third stage, in which we are
targeting corporate governance that furthers sustainable growth.
We will achieve tense collaboration by balancing management over-
sight and supervision with the broad authority vested in the
President and CEO, which that executive needs in order to exercise
ultimate leadership of Shiseido’s global management.
The objective of this tense collaboration is not to excessively
limit or decrease the CEO’s authority, but to establish a process
driven by full accountability of the CEO to the Board of Directors
and other supervisory organs to regularly evaluate the CEO and
management execution given the broad authority vested in the CEO.
Tense collaboration will enable both swift management decisions by
the CEO and the ability of supervisory organs to quickly and effec-
tively exercise potent checks and put on the brakes as needed.
Evol
utio
n of
Shi
seid
o’s
corp
orat
e go
vern
ance
2001 2005 2014
1st Stage
2nd Stage
3rd Stage
Achieve tense collaboration
Launch of management
reforms including corporate
governance reforms
Introduced the corporate officer system
Introduced 1-year termsfor corporate officers
Established Remuneration Advisory Committee
Others
Established Nomination AdvisoryCommittee
Set upper term limit per posit ion for corporate officers (in principle, 4 years)
Appointed external directors
Established standards for assessing the independence of external directors and external Audit & Supervisory Board members
Others
Review corporate governance design to encourage intelligent risk taking without excessively limiting the President and CEO’s authority for business execution and personnel matters
Continuously reform the Board of Directors and commit tee system and framework to ensure appropriate oversight and supervision of the President and CEO’s authority for business execution and personnel matters
Corporate governance system
upgrades
Evolution to corporate governance that furthers
sustainable growth by balancing the President and
CEO’s authority with oversight and supervision
Moving to the Third Stage of Corporate Governance
Progress of the Evolution of Corporate Governance
Shiseido’s Governance by the Numbers – Directors and Audit & Supervisory Board Members(As of March 31, 2017)
For more information on our corporate governance
General Meeting of Shareholders/
Corporate Governance▶ http://www.shiseidogroup.com/ir/account/ ・Corporate Governance Policy ・Corporate Governance Report ・Notice of Convocation etc.
57
Exec
utive
Vic
e Pr
esid
ent
Corp
orat
e Ex
ecut
ive O
ffice
r
Corp
orat
e Ex
ecut
ive O
ffice
r
Corp
orat
e Ex
ecut
ive O
ffice
r
Corp
orat
e Of
ficer
Corp
orat
e Of
ficer
Corp
orat
e Of
ficer
Corp
orat
e Of
ficer
Corp
orat
e Of
ficer
Corp
orat
e Of
ficer
Corp
orat
e Of
ficer
Corp
orat
e Of
ficer
Corp
orat
e Of
ficer
Corp
orat
e Of
ficer
Corp
orat
e Of
ficer
Regi
onal
Hea
dqua
rter
s Pr
esid
ent
Regi
onal
Hea
dqua
rter
s Pr
esid
ent
Regi
onal
Hea
dqua
rter
s Pr
esid
ent
Representative Director, President and CEO
Personnel matters (hire and promote/demote)
Evaluate performance and set remuneration
Delegate authority(determine areas of responsibility)
Representative Director, President and CEO’s Authority
and Responsibilities
Total authority for business execution under supervision of the Board of Directors
Total authority over management team in top position of management pyramid
Accountable to supervisory organsincluding the Board of Directors
regarding business execution
Accountable to supervisory organs including the Board of Directors regarding exercise of authority M
anag
emen
t Te
am
Nomination Advisory Committee
Remuneration Advisory Committee
Request reports and explanation relating toexecution of business and exercise of authority
Approve CEO candidates/select and reappoint CEO
Evaluate performance andset remuneration
Remove CEO/representative directors if necessary
Sup
ervi
seIn
tern
al C
ontr
olIn
stru
ct
Compliance Committee
Board of Directors
Corporate Governance SystemBasic Policy
The Shiseido Group, including Shiseido Company, Limited (the
Company), set out “to inspire a life of beauty and culture” as its cor-
porate mission, and defines corporate governance as its “platform to
realize sustainable growth by fulfilling its corporate mission.”
We strive to maximize medium-to-long-term corporate and share-
holder value by implementing and reinforcing corporate governance
to maintain and improve management transparency, fairness and
speed, and through dialogue with all stakeholders from consumers,
business partners, employees, and shareholders to society and the
Earth. At the same time, by fulfilling its responsibilities as a member
of society, the Shiseido Group works to optimize the value it delivers
to respective stakeholders.
Reason for Choosing the Current Structure
The Company has selected the framework of a company with an
Audit & Supervisory Board structure with double check functions for
business execution: supervision by the Board of Directors and audits of
legality and adequacy by Audit & Supervisory Board members. In order
to maintain and improve management transparency, fairness and speed
as per the basic policy for corporate governance, the Company has rein-
forced the supervisory function of the Board of Directors by incorporating
outstanding functions including those of a company with committees
such as a nominating committee.
Effective January 2016, the Shiseido Group committed to a new
matrix organization encompassing five brand categories and six
regions. Under this organization, the Company serves as the global
headquarters responsible for providing overall supervision of the
Group and the support it requires, and is promoting localization of
responsibility and authority by delegating much of the authority for-
merly exercised by the Company to respective regional headquarters
for Japan, China, Asia Pacific, the Americas, EMEA, and Travel Retail.
The Board of Directors frequently discussed issues including the com-
position and operation of the Board of Directors to determine an ideal
corporate governance system, premised on this organization and man-
agement structure. As a result, the Board of Directors concluded that
adopting a monitoring board structure would be appropriate for ensur-
ing adequate overall supervision of the Shiseido Group, and resolved
to implement monitoring board corporate governance while leveraging
the advantages of a company with an Audit & Supervisory Board.
Diversity of Directors and Audit & Supervisory Board Members
The Company believes that the Board of Directors of the Company
should be composed of directors with various viewpoints and back-
grounds, on top of diverse and sophisticated skills, for effective super-
vision over the execution of business as well as decision-making on
critical matters. Furthermore, the Company believes that Audit &
Supervisory Board members should have the same diversity and
sophisticated skills as the directors, as they have a duty to attend
meetings of the Board of Directors and state opinions as necessary.
When considering diversity, the Company selects candidates based
on their personality and insight regardless of attributes such as gender,
age and nationality in order to stress diversity of these attributes as
well as diversity in terms of competencies including professional skills
and experience in various fields related to business management.
In addition, the Company has set term limits for external directors
and external Audit & Supervisory Board members so that management
Management Supervision System
Management Section
58
can benefit from views that are not bound by the Company’s existing
structures, and ensures appropriate transition to newly appointed
external directors and external Audit & Supervisory Board members by
allowing a handover period from those who have served for an
extended period.
Ratio of External Directors on the Board of Directors
The Company’s articles of incorporation limit the number of
directors to 12. The Company considers issues including business
portfolio and scale in electing the optimum number of directors to
appropriately supervise management.
The Company shall have at least three external directors to
ensure that they have a certain degree of influence within the Board
of Directors. The Company has established a target of making at least
half of the directors external.
Independence is an emphasis in selecting external directors and
Audit & Supervisory Board members. In principle, external director and
Audit & Supervisory Board member candidates must meet the
Company’s criteria for independence and have an independent mindset.
Succession Plan and Training for Directors, Audit and
Supervisory Board Members and Corporate Officers
The Company recognizes the importance of succession plans for
the CEO as its leading officer and for external directors and external
Audit & Supervisory Board members who play key roles in supervising
management. The Company has a succession plan that includes lim-
its on term of office and clear criteria for successor candidates, and
is consistently on the agenda of the Nomination Advisory Committee
rather than only prior to a succession event.
The Company also recognizes the importance of appointing
people with requisite credentials to serve as directors, Audit &
Supervisory Board members and corporate officers, and providing
them with necessary training and information. The Company provides
training for director and Audit & Supervisory Board member candi-
dates on matters including legal and statutory authority and obliga-
tions, and uses training programs provided by external institutions as
necessary. The Company also provides training for newly appointed
external directors and external Audit & Supervisory Board members
regarding the Company’s industry, history, business overview, strategy
and other background.
Furthermore, the Company enhances the leadership capabilities
of executive directors and corporate officers by conducting an in-
house executive program and using training at external institutions.
We cultivate the next generation of executives by providing training for
executives who are corporate officer candidates to nurture the leader-
ship and management skills required for senior management.
Committees
With a view to promoting transparency and objectivity in manage-
ment, the Company has established two committees to advise the
Board of Directors: the Nomination Advisory Committee, which makes
recommendations on director and corporate officer candidates and
promotions; and the Remuneration Advisory Committee, which makes
recommendations on executive remuneration and performance evalu-
ation standards. Both committees are chaired by external directors to
ensure objectivity.
Furthermore, the Compliance Committee has been established
as a committee that reports directly to the CEO. It collaborates with
compliance organizations at the six regional headquarters and pro-
vides overall direction for activities that improve corporate quality,
including the promotion of legal compliance, fair business practices
and risk countermeasures. Chaired by the Executive Vice President,
the committee is composed of members from across the Shiseido
Group, including the heads of each region.
Evaluation Working Group
The Company’s aim in corporate governance is to appropriately
concentrate authority in the CEO while maintaining a strong oversight
function to counterbalance that authority. Accordingly, the Company has
established the Evaluation Working Group as a shared organization of
the Nomination Advisory Committee and the Remuneration Advisory
Committee to discuss and consider matters relating to the CEO, includ-
ing reappointment and replacement. The Evaluation Working Group con-
ducts performance evaluation that includes a personal evaluation of the
CEO, and confirms the appropriateness of the CEO’s remuneration. In
this way, the Evaluation Working Group comprehensively oversees the
CEO from two aspects: appointment and dismissal, and incentives. To
emphasize its independence from the CEO and the CEO’s business exe-
cution framework, the Evaluation Working Group consists solely of
external directors and external Audit & Supervisory Board members.
Criteria for Independence of External Directors and Audit &
Supervisory Board Members (Summary)
· Not a person who is or has ever been responsible for executing the business of the Company or its affiliated companies (collectively the Shiseido Group)
· Not a person of which the Shiseido Group is or has ever been a major client
· Not a person who is or has ever been a major client of the Shiseido Group
· Not a person who is or has ever been a major shareholder of the Company
· Not a person who executes or has ever executed business for an entity in which the Shiseido Group is a major shareholder
· Not a professional such as an attorney or a consultant who has received a large amount of money from the Shiseido Group
· Not a person who is receiving or has ever received a large donation of money or assets from the Shiseido Group
· Not a person who is or has ever been an accounting auditor of the Company
· Not a spouse or close relative of any person excluded above
· Not a person affiliated with a company that reciprocally appoints a director or Audit & Supervisory Board member from the Shiseido Group
· Not a person who could otherwise be reasonably judged unable to fulfill the duties of an independent director or independent Audit & Supervisory Board member
(Please refer to the Corporate Governance Report available at Shiseido’s corporate web-
site for details.)
http://www.shiseidogroup.com/ir/account/governance/
59
Remuneration for Directors, Audit & Supervisory
Board Members and Corporate Officers
Overview of the Policy for Remuneration for Directors, Audit &
Supervisory Board Members and Corporate Officers
The Company regards the remuneration policy for directors, Audit
& Supervisory Board members and corporate officers as an important
matter for corporate governance. The policy is therefore designed by
the Remuneration Advisory Committee chaired by an external director,
based on the following basic philosophy, while incorporating objective
points of view.
Remuneration for directors and corporate officers consists of
basic remuneration and performance-linked remuneration. The
Company sets appropriate remuneration levels by making comparisons
with companies in the same industry or of the same scale in Japan and
overseas, taking the Company’s financial condition into consideration.
External directors and Audit & Supervisory Board members receive
only basic remuneration, as fluctuating remuneration such as perfor-
mance-linked remuneration is inconsistent with their supervisory func-
tions from a stance independent from business execution. Shiseido
also abolished its officers’ retirement benefit plan as of June 29, 2004,
the date of the 104th Ordinary General Meeting of Shareholders.
Director, Audit & Supervisory Board Member and Corporate
Officer Remuneration Policy for the Three Years through
December 2017
The Company has positioned the three years ending December
2017 as the period for reengineering its business foundation to
enable accelerated growth in the three years ending December 2020.
Accordingly, the remuneration policy for directors and corporate offi-
cers for the three years ending December 2017 is designed to moti-
vate directors and corporate officers to lead this transformation by
implementing drastic reforms.
The Company assumes that financial data such as consolidated
results and the results of businesses for which the officers are
responsible will take time to reflect the outcomes of the reengineering
of the business foundation. In addition, some challenges to be
resolved may require actions such as optimization of market inventory
levels that may negatively impact business performance data in the
short term. To achieve long-term growth, however, these issues must
be resolved. The Company has therefore adopted an individual perfor-
mance evaluation framework for both basic and performance-linked
remuneration that is based on the achievement of strategic targets to
provide incentives for directors and corporate officers to strategically
resolve those issues from a long-term growth perspective.
The current remuneration policy for directors and corporate offi-
cers based on this mindset provides basic remuneration and perfor-
mance-linked remuneration. Performance-linked remuneration consists
of an annual bonus provided based on annual results, and stock
options as long-term incentive remuneration that are designed to align
the interests of directors and corporate officers with those of share-
holders and to give them a medium-to-long-term perspective, not just
a single-year focus.
This remuneration policy is designed specifically to ensure suc-
cessful reengineering of the business foundation. The Company will
therefore review it again in the year ending December 2018 and after.
· Basic Remuneration
Basic remuneration corresponds to each officer’s role grade, which is
based on the scale and scope of responsibilities and impact on Group
management. Moreover, basic remuneration may increase within the same
role grade within a designated range in accordance with the performance
of respective directors or corporate officers in the previous fiscal year in
terms of numerical business performance and personal performance eval-
uation. This mechanism allows the Company to adjust basic remuneration
in light of the achievements of respective directors and corporate officers.
The Company will continue to pay external directors and Audit &
Supervisory Board members fixed basic remuneration with no variable
component as under the previous system.
Members of the Nomination Advisory Committee and the Remuneration Advisory Committee
Nomination Advisory Committee
〔Chair〕 Tatsuo Uemura, External Director
〔Members〕 Yoko Ishikura, External Director
Shoichiro Iwata, External Director
Kanoko Oishi, External Director
Masahiko Uotani, Representative Director, President and CEO
Remuneration Advisory Committee
〔Chair〕 Shoichiro Iwata, External Director
〔Members〕 Yoko Ishikura, External Director
Kanoko Oishi, External Director
Tatsuo Uemura, External Director
Masahiko Uotani, Representative Director, President and CEO
The remuneration policy for directors, Audit & Supervisory
Board members and corporate officers shall:
1. contribute to realizing the corporate mission;
2. be designed to provide the amount of remuneration commensurate with the Company’s capability to secure and maintain superior personnel;
3. be designed to reflect the Company’s medium-to-long-term business strategy, and to strongly motivate directors, Audit & Supervisory Board members and corporate officers eligible for remuneration to achieve medium-to-long-term growth;
4. have a mechanism incorporated to prevent wrongdoing and overempha-sis on short-term views; and
5. be designed to be transparent, fair and reasonable from the viewpoint of accountability to stakeholders including shareholders and employees, and shall ensure these points by determining remuneration through appropriate processes.
Management Section
60
· Annual Bonus
The Company has determined evaluation items for the annual
bonus linked to performance in accordance with the scope of respon-
sibilities of the respective director or corporate officer as described in
the table below. In addition, the achievement rates for consolidated
net sales and consolidated operating income targets are common
· Long-Term Incentive Remuneration
The Company has imposed performance terms and conditions on
the stock compensation-type stock options included in performance-
linked remuneration. The limits on this long-term incentive remunera-
tion apply on two occasions: when the stock acquisition rights are
allotted, and when the allotted stock acquisition rights have vested.
When actually allotting the stock acquisition rights after obtaining
approval for the maximum number of stock acquisition rights to be
allotted at the General Meeting of Shareholders, the Company shall
increase or decrease the number of stock acquisition rights to be
granted in the range of 0 to the maximum by using the performance
indicators for annual bonuses for the preceding fiscal year. In addition,
the Company has introduced a mechanism when the stock acquisition
rights vest that limits the exercise of stock acquisition rights to 30 to
100 percent of the allotted number, according to consolidated results
and other indicators up to the preceding fiscal year. The Company is
thereby enhancing the incentive to improve medium-to-long-term busi-
ness performance and achieve targets.
performance indicators used for all directors and corporate officers.
The policy also has a personal performance evaluation component for
all directors and corporate officers to provide a standard for evaluat-
ing the level of achievement of strategic goals in initiatives such as
reengineering the business foundation for sustainable growth that
cannot be measured with financial performance data.
Proportion of Remuneration by Remuneration Type for Each Rank of Director
Rank as Corporate Officer
Composition of remuneration as corporate officer
Basic remunerationPerformance-linked remuneration
TotalAnnual bonus
Long-term incentiveremuneration
President and CEO 50% 25% 25%
100%
Executive Vice President 54% - 56% 22% - 23% 22% - 23%
Corporate Senior Executive Offi cer 54% - 58% 21% - 23% 21% - 23%
Corporate Executive Offi cer 54% - 60% 20% - 23% 20% - 23%
Corporate Offi cer 56% - 64% 18% - 22% 18% - 22%
Notes: 1. In this model, the basic remuneration amount is the median in the applicable role grade, and the achievement rate related to performance-linked remuneration is 100%.
2. There is no difference in the proportion of remuneration by remuneration type applied to directors based on whether a director has representation rights.
3. Because different remuneration tables will be applied depending on the role grade of respective directors and corporate officers, proportion of remuneration by
remuneration type will vary even within the same rank.
4. Directors who serve as the chairman of the Board shall be provided with a fixed amount of remuneration separately, which is not, however, included in the table.
Note: There is no difference in the performance indicators and the weight of those indicators applied to directors based on whether a director has representation rights.
Evaluation item Performance indicators
Evaluation weight
President and CEO
Corporate officers in charge of businesses Corporate officers other than those in charge of businesses
Regional headquar-ters President Other CFO Others
Whole Groupperformance
Consolidated net sales 20%
70%
5%
20%
10%
20%
20%
70%
20%
70%Consolidated operating income 30% 10% 10% 30% 50%
Net income attributable to owners of parent 20% 5% — 20% —
Performance ofbusiness unit in charge
Business performanceevaluation — 50% 50% — —
Personal evaluation Level of achievement ofstrategic goals set individually 30%
Evaluation Weights of Annual Bonus for Directors
When stock acquisition rights are allotted:· Use the same consolidated results data (net sales, operating income and
net income attributable to owners of parent), evaluation of responsibility for business performance, and personal performance evaluation that are employed in calculating annual bonus for each officer.
· Determine the number of stock acquisition rights to be allotted based on deliberation by and resolution of the Board of Directors.
When the stock acquisition rights vest:· Calculate the operating income growth rate by comparing operating income
for the fiscal year preceding the fiscal year in which the stock acquisition right allotment date is included with the subsequent fiscal year.
· Calculate the operating income growth rates for the same fiscal yearsas above for international cosmetics industry sales leaders including Kao Corporation (Japan), L’Oreal S.A. (France) and Estée Lauder Companies Inc. (U.S.A.), which have been designated in advance for peer comparison.
· Decide the number of stock acquisition rights allotted to each director or corporate officer exercisable by comparing the operating income growth rate of the Company with its designated peers.
Terms and Conditions Regarding Performance on Long-Term
Incentive-Type Remuneration
61
Schedule of Allotment and Exercise of Long-Term Incentive Remuneration
2017/12 2019/12 2020/122018/12
March (General Meeting of Shareholders)
Resolution for approval of the maximum number to be allotted
Determination of the number to be allotted based on 2017 results and allotment
Determination of the exercisable number based on results up to 2019
March (Board of Directors) August (Board of Directors)
Waiting period Exercisable period
Remuneration for Directors and Audit & Supervisory Board Members for the Year Ended December 2016 (Millions of yen)
Basic BonusesLong-Term Incentive
(Stock Options)Total
Directors (7) 272 120 50 443
External directors(4 of the 7 directors) 49 — — 49
Audit & Supervisory Board members (5) 99 — — 99
External Audit & SupervisoryBoard members (3 of the 5 members)
36 — — 36
Total 372 120 50 542
Notes:
1. Basic remuneration for directors has the ceiling amount of ¥30 million per month
as per the resolution of the 89th Ordinary General Meeting of Shareholders held
on June 29, 1989. Basic remuneration for Audit & Supervisory Board members
has the ceiling amount of ¥10 million per month as per the resolution of the
105th Ordinary General Meeting of Shareholders held on June 29, 2005.
2. The above amount of basic remuneration includes ¥23 million as basic remunera-
tion for the year ended December 2016 that one subsidiary of the Company paid
through the Company to one director of the Company who served concurrently as
the director of said subsidiary.
3. The amount of long-term incentive stock options indicated above represents the
expenses for the year ended December 2016 associated with stock options
(stock acquisition rights) granted in the period, upon the approval of the Ordinary
General Meeting of Shareholders, in consideration of duties executed by directors.
4. In addition to the above payments, ¥0.3 million was recognized for the year
ended December 2016 as expenses associated with stock options granted to
one director when that director was a corporate officer, not a director.
5. None of the directors or the Audit & Supervisory Board members will be paid
remuneration other than the executive remuneration described above (including
remuneration described in Notes 1 through 4, above).
Remuneration by Type to Representative Directors and Directors Whose Total Remuneration Exceeded ¥100 Million for the Year Ended December 2016 (Millions of yen)
Basic BonusesLong-Term Incentive
(Stock Options)Total
Masahiko UotaniRepresentative Director
129 77 29 236
Tsunehiko IwaiRepresentative Director
47 21 6 75
Toru SakaiRepresentative Director
47 20 14 82
Notes:
1. The above amount of basic remuneration includes ¥23 million as basic remuner-ation for the year ended December 2016 that one subsidiary paid through the Company to Representative Director Toru Sakai, who served concurrently as the director of said subsidiary.
2. The amount of long-term incentive stock options indicated above represents the expenses for the year ended December 2016 associated with stock options (stock acquisition rights) granted, upon the approval of the Ordinary General Meeting of Shareholders, in consideration of duties executed by directors.
3. Neither of the three directors above will be paid remuneration other than the remuneration described above (including remuneration described in Notes 1 and 2, above).
Management Section
62
64 Financial and Non-Financial Highlights
68 Market Data
70 11-Year Summary of Selected Financial Data
72 Financial Section
110 Corporate and Investor Information
111 Summary of Information by Topic
DataSection
63
2014201320122011201020092008
Net sales (Left scale) Operating income (Far right scale) Operating profitability (Right scale)
(Billions of yen)(Billions of yen)
2015/122015/3 2016/12(Adjusted)
2015/12
(%)
0
200
400
600
800
0
25
50
75
100
0
3
6
9
12
8.8
7.26.5
3.64.35.13.8
5.76.6
7.8
4.9
63.549.9 50.4
44.5
26.0
39.1
49.6
27.6
36.8
850.3863.3
37.7
723.5690.3 677.7682.4670.7644.2
762.0 777.7 763.1
44.3
(Yen)
Net income (loss) per share (Left scale) Return on equity (Right scale)
(%)
2014201320122011201020092008 2015/122015/3 2016/12-50
-25
0
25
50
75
100
-10
-5
0
5
10
15
20
2014201320122011201020092008 2015/122015/3 2016/12
86.1 84.6
32.1
-5.1
6.0
8.2
-36.9
36.5
9.848.0
65.7
84.4
58.2
80.4
9.2 9.4
3.95.4 4.9
8.4
Net Sales, Operating Income and Operating Profitability1
Net Income (Loss) per Share2 and Return on Equity3,4
Interest-Bearing Debt and Interest-Bearing Debt Ratio3,5
Financial Value
Financial and Non-Financial Highlights
Data Section
0
50
100
150
200
250
2016/122015/122015/320142013201220112010200920080
8
16
24
32
40(Billions of yen)
Interest-bearing debt (Left scale) Interest-bearing debt ratio (Right scale)
13.7 15.0
38.2 37.9
30.3
63.2
20.7
197.5
37.9
17.3
22.6
184.7185.2
37.0
155.9
106.986.6
120.6
214.4
62.1
(%)
Notes:
1. The fiscal period ended December 31, 2015 is the 9 months from April 1, 2015 to December 31, 2015 for Shiseido and consolidated subsidiaries whose account settlement date was March 31 and the 12 months from January 1, 2015 to December 31, 2015 for consolidated subsidiaries whose account settlement date was December 31. In this report, it is referred to as “the period ended December 2015” in the text and as “2015/12” in tables, charts and graphs. For comparisons with the year ended December 2016, this report uses results for the 12 months ended December 2015, referred to as “2015/12 (Adjusted)” in tables, charts and graphs.
2. Net income (loss) per share is calculated before dilution based on the average number of shares outstanding during the fiscal year/period.
3. Shiseido Group subsidiaries in the Americas formerly recognized samples and promotional items associated with marketing activities at stores as assets when acquired and expensed them when shipped to customers. However, effective the year ended March 2012 these subsidiaries began to expense these items when acquired as part of its efforts to standardize Group accounting policies. The Shiseido Group applied this change retrospectively and restated the consolidated financial statements for the year ended March 2011 accordingly. Changes in accounting treatment due to the amendment of Employee Benefits (International Accounting Standard (IAS) No. 19) are not retrospectively applied prior to the year ended March 2012.
4. For calculating consolidated ROE for the period ended December 2015, the numerator used is net income attributable to owners of the parent for the nine months ended December 31, 2015 for Shiseido and its con-solidated subsidiaries whose fiscal year ended in March, and for the 12 months ended December 31, 2015 for consolidated subsidiaries whose fiscal year ended in December. The ROE is 7.6 percent when calculated based on net income attributable to owners of the parent for the 12 months ended December 2015.
5. Interest-bearing debt ratio = Interest-bearing debt / Invested capital* *Invested capital = Interest-bearing debt + Total net assets
64
-5
0
5
10
15
20
11.410.5
10.1 9.3
(%)
5.1 3.03.82.6
8.3
1.9
-1.0
9.9
13.813.414.6
11.28.8
7.95.5
10.1
4.8
6.38.1
-1.1
11.1
0.4
17.5
12.6
3.52.2
-6.8
-8.1
22.1
12.6
4.2
0.8
-3.1-0.4
14.0
(Adjusted)
Global Business OthersDomestic Cosmetics Business
OthersJapan Business Global BusinessPeriod ended December 2015
Years ended March 2008-2015 Year ended
December 2016
Japan Business China Business Asia Pacific Business
Americas Business EMEA Business Travel Retail Business
2015/122015/32014201320122011201020092008 2015/12 2016/12
0
200
400
600
800
(Billions of yen)
(Adjusted)Domestic Cosmetics Business Global Business Others
Japan Business Global Business OthersPeriod ended December 2015
Years ended March 2008-2015
Japan Business China Business Asia Pacific Business Americas Business EMEA Business Travel Retail BusinessYear ended December 2016
2015/122015/122015/32014201320122011201020092008 2016/12
423.9
278.8
20.8
397.6
275.7
17.0
383.8
250.4
10.0
358.4
302.6
9.7
353.8
319.7
8.9
345.9
322.3
9.5
349.7
402.2
10.1
339.3
427.9
10.5 17.5
478.8
266.8
24.8
85.2
162.6
49.6
120.5
407.6
52.7
167.5
104.2
17.2
125.7
396.0
Operating Profitability by Reportable Segment1,7,9,10,11,12
EBITDA6 and Free Cash Flow
Net Sales by Reportable Segment1,7,8,10,11,12
EBITDA Free cash flow (Cash flows from operating activities + Cash flows from investing activities)
(Billions of yen)
2014201320122011201020092008 2015/122015/3 2016/12-135.5
95.0
75.1 75.765.6
-11.5
14.6
37.3 31.9
16.5
67.5
43.737.4
69.5
90.180.6
90.791.3
61.5
77.0
-150
-20
25
0
75
50
100
6. EBITDA (Earnings before interest, tax, depreciation and amortization) = Income (loss) before income taxes + Interest expense + Depreciation and amortization + Impairment loss on goodwill and other intangible assets
7. Domestic Professional Division sales are included in the Global Business segment.
8. Net sales by reportable segment represent sales to external customers only and do not include intersegment/interarea sales or transfers.
9. Operating profitability by reportable segment does not include eliminations/corporate.
10. Segments were changed to reflect application of the “Revised Accounting Standard for Disclosures about Segments of an Enterprise and Related information” (ASBJ Statement No. 17 of March 27, 2009) in the year ended March 2011. The change in segments has been retrospectively applied to data for years ended March 2010 and earlier.
11. The Company partially revised its reportable segment classification method effective from the period ended December 2015. Accordingly, the “Domestic Cosmetics Business” and “Global Business” segments were reclassified as the “Japan Business” and “Global Business” segments, respectively. Taking into account this change, certain subsidiaries previously included in the “Domestic Cosmetics Business” segment were re-allocated to the “Global Business” and “Others” segments. Moreover, in order to more accurately grasp actual operating results in each segment, the allocation method for certain expenses was also revised.
12. Effective from the year ended December 2016, reportable segment classifications have been changed from the “Japan Business” and “Global Business” segments to the “Japan Business,” “China Business,” “Asia Pacific Business,” “Americas Business,” “EMEA Business” and “Travel Retail Business” segments in accordance with changes in the organizational structure of the Shiseido Group. Segment information for the 12 months ended December 2015 has been restated in line with changes in the method of classifying reportable segments.
65
2016/122015/122015/320142013201220112010200920080
10
20
30
40
50
34.0
1.3
50.0
39.5
104.1
50.0
3.559.1
50.0
2.5
155.5
50.0
3.5
137.1
50.0
3.53.8
20.0 20.0 20.0 20.0
30.5
1.10
40
80
120
160
200
0
2
4
6
8
10
0.8 0.7
24.934.4
0.9
23.7
(%) (%)(Yen)
Cash dividends per share (Right scale) Dividend yield (Far right scale)Consolidated payout ratio (Left scale)
2015/12 2016/122015/320142013201220112010200920080
Price/Book value ratio (PBR) (Right scale)Price/Earnings ratio (PER) (Left scale)
(Times) (Times)
3
0
6
9
40
20
60
2.3
44.8
27.730.6 29.9
2.8
1.7
24.0
1.9 2.0
39.2
2.6
43.5
3.0
36.8
2.2
25.3
1.9 2.1
0
3,500
7,000
10,500
14,000
17,500
21,000
0
500
1,000
1,500
2,000
2,500
3,000
(Yen) (Yen)
March2015
December2015
December2016
March2014
March2013
March2012
March2011
March2010
March2009
March2008
Nikkei stock average (Right scale)Shiseido share price (Left scale)
13. PER and consolidated payout ratio are not presented for the year ended March 2013 because of the net loss.
14. Price/Earnings ratio = Closing stock price at fiscal year-end / Net income per share
15. Price/Book value ratio = Closing stock price at fiscal year-end / Net assets per share
16. Dividend yield = Cash dividends per share / Closing stock price at fiscal year-end
Shiseido Share Price & Nikkei Stock Average
Price/Earnings Ratio (PER)13, 14 & Price/Book Value Ratio (PBR)15
Consolidated Payout Ratio,13 Cash Dividends per Share & Dividend Yield16
Shareholder Value
Data Section
66
Shiseido has been energeti-
cally promoting women to
posit ions of leadership.
Overseas, nearly 70 percent
of leadership positions are
held by women. In Japan, the
percentage of women in lead-
ership positions was 30 percent
as of December 31, 2016, thus
achieving our goal for the year.
Since 1990, Shiseido has
introduced systems and pro-
grams to raise the productivity
of employees by helping them
balance work with childcare
and nursing care. As a result,
the stability rate for employ-
ees in Japan returning to work
after taking childcare leave
has remained at a high level.
We are strengthening promo-
tion of diversity because we
believe that collaboration
among employees with diverse
ideas and values enables us
to create new value. We have
raised the number of non-
Japanese hires since the year
ended March 2012. We are
also emphasizing mid-career
hiring, which has more than
doubled over the same period.
17. For years ended March 2011 through March 2015, percentage of female leaders is as of April 1 each year in Japan and January 1 each year overseas. For the period ended December 2015 and the year ended December 2016, percentage of female leaders is as of December 31.
18. Number of employees who returned to work after taking childcare leave in the previous fiscal year and are still working as of the end of the current year / total number of employees who returned to work after taking childcare leave in the previous fiscal year x 100
19. Target personnel in Shiseido Group companies in Japan: managerial/major career path personnel; target personnel in Shiseido Japan Co., Ltd.: beauty consultants (excluding fixed-term contract employees)
20. Shiseido Company, Limited data
Human and Social Value
0
10
20
30
50
40
0
0
40
20
60
80
100
40
20
60
80
100
17
42
(0.73%)
(3.23%)
(Number of people)
58.756.5
42.0
61.8
(%)
22.2
43.9
22.9 25.6
47.3
63.9
26.8
49.7
27.2
50.2
62.5
30.0
69.3
53.2
28.5
64.5
50.6
96.996.3 94.4 94.4
10010095.4
98.8
89.8
97.8(%)
90.8
95.7
95.3
98.5
2016/122012/3
2014201320122011 2016/122015/122015/3
0
10
20
30
50
40
31
41
(1.84%)
(3.16%)
(Number of people)
2016/122012/3
Overseas JapanTotal
Shiseido Japan Co., Ltd.Shiseido Group in Japan
2014201320122011 2016/122015/122015/3
Stability Rate for Employees in Japan Returning to Work after Taking Childcare Leave18
Non-Japanese Hires19 Mid-Career Hires20
Percentage of Female Leaders17
67
Beauty and Personal Care Market Scale1 by Country, Per Capita GDP and Median Age2
Beauty and Personal Care Market Scale by Country and Population (2016)
Source for beauty and personal care market scale: Euromonitor International, as of April 4, 2017
Source for per capita GDP, median age and population: “World Statistics 2017,” Statistics Bureau, Ministry of Internal Affairs and Communications
Notes: 1. Circle size indicates beauty and personal care market scale
2. The midpoint age separating the upper from the lower half of ages for each population ranked in order from the lowest to highest
CountryBeauty and Personal Care
Market Scale (Millions of U.S. dollars)
Population (Millions)
United States 84,836 324
China 50,226 1,382
Japan 37,075 127
Brazil 29,294 210
Germany 17,947 81
France 14,402 65
India 12,061 1,327
CountryBeauty and Personal Care
Market Scale (Millions of U.S. dollars)
Population (Millions)
Italy 10,816 60
Russia 9,140 143
Spain 8,010 46
Thailand 5,318 68
Indonesia 4,620 261
Turkey 3,650 80
Vietnam 1,331 94
Beauty and Personal Care Markets by Country
Vietnam
Japan
ChinaThailand
Indonesia
United States
Brazil
Germany
FranceSpain
Turkey
Russia
Italy
0 30,00020,00010,000 40,000 50,000 60,00020
25
30
35
40
45
50
Med
ian
age
Per capita GDP (U.S. dollars)
(Years)
India
Market Data
Data Section
(Excluding Hong Kong)
68
Beauty and Personal Care Market Scale by Area2 (2016)
Market Growth Rate: North America3
Market Growth Rate: Asia Pacifi c3
Market Growth Rate: Western Europe3
Market Composition by Beauty Category Market Composition by Channel
Please note that the relevant market data were compiled from data publicly available from several institutions and are
not directly related to Shiseido’s strategies. Also, annual data for each region are calculated based on local currencies
translated into U.S. dollars at average 2016 exchange rates.
20162015201420132012 (Calendar years)
(%)
1.410.5
23.3
2.60.22.6
9.512.6
29.0
8.2
Other
Salon
Mail order(including Internet)
In-home
Convenience store
Home center/Discount store
Supermarket
Department store
Cosmetics store
Pharmacy
Source for market composition by channel: INTAGE Inc., SLI survey of general cosmetics market (cosmetics, haircare, body care, and others defi ned by Shiseido), January 1, 2012 to December 31, 2016 comparison of purchases (value base) by beauty categories defi ned by Shiseido
Source for market composition by beauty category: INTAGE Inc., SLI survey of general cosmetics market (cosmetics, haircare, body care and others defi ned by Shiseido), January 1, 2012 to December 31, 2016 comparison of purchases (value base) by channel
Notes: 1. Foundation, eye shadow, lipstick, etc. 2. Bath additives, sunscreen, deodorant, etc. 3. Makeup remover, makeup base, beauty lotion, etc. Also includes facial cleansers.
Source: Euromonitor International, as of April 4, 2017Notes: 1. Categories are not delineated by price. They are determined comprehensively by Euromonitor International based on standards for positioning, price, sales channel, sales
volume and other data for each area. 2. Excluding depilatories, men’s shaving and oral care categories 3. Asia Pacifi c: 46 countries including Japan, China and India; North America: Canada and the United States; Western Europe: 25 countries including France, the United Kingdom
and Italy
Premium Mass
(Millions of U.S. dollars)
North AmericaAsia Pacific
124,720
36,825
28,049 25,438
52,65350,130
87,895
78,179 78,091
Premium Mass
Western Europe
(%)
2.2
4.34.3
2.6
2.51.8
3.2
7.87.5
201620152014 (Calendar years)
Total of premium and massMassPremium
(%)
5.95.0
4.7 4.9
5.36.4
201620152014 (Calendar years)
Total of premium and massMassPremium
5.6
5.75.6
(%)
1.5
1.8 2.02.2
2.3 2.7
1.2 1.5
1.6
201620152014 (Calendar years)
Total of premium and massMassPremium
20162015201420132012 (Calendar years)
(%)0.5
15.1
0.6
18.0
10.9
54.9
Fragrance
Hair
Nails
Makeup1
Body2
Skincare3
Beauty and Personal Care Market Trends by Area (Premium and Mass Categories1)
The Domestic Cosmetics Market
69
2007/3
2008/3
2009/3
2010/3
2011/3
Operating Results:
Net sales
Cost of sales
Selling, general and
administrative expenses Operating income EBITDA Net income (loss) attributable to
owners of parent
Financial Position
(At period-end):
Total assets Short-term liabilities Long-term debt Interest-bearing debt Net assets
Cash Flows:
Cash flows from operating activities
Cash flows from investing activities
Cash flows from financing activities
Cash and cash equivalents at end of year
Per Share Data
(In yen and U.S. dollars):
Net income (loss) Net assets Cash dividend Weighted average number of
shares outstanding during
the period (thousands)
Financial Ratios:
Operating profitability (%)
Return on assets (%)
Operating ROA (%)
Return on equity (%)
Equity ratio (%)
Interest coverage ratio (times)
Debt-equity ratio (times)
Interest-bearing debt ratio (%)
Payout ratio (Consolidated) (%)
Number of employees
at year-end
Net sales per employee
Notes: 1. The fiscal period ended December 31, 2015 is the 9 months from April 1, 2015 to December 31, 2015 for Shiseido and its consolidated subsidiaries in Japan and the 12 months from January 1, 2015 to December 31, 2015 for all other subsidiaries. In this report, it is referred to as “the period ended December 2015” in the text and as “2015/12” in tables, charts and graphs.
2. Amounts less than one million yen are omitted.
3. U.S. dollar amounts are converted from yen, for convenience only, at the rate of ¥116.53 = US$1 prevailing on December 31, 2016.
4. EBITDA (Earnings before interest, tax, depreciation and amortization) = Income (loss) before income taxes + Interest expense + Depreciation and amortization + Impairment loss on goodwill and other intangible assets
5. Effective from the fiscal period ended December 31, 2015, Shiseido has applied the “Accounting Standard for Business Combinations” (Accounting Standards Board of Japan (ASBJ) Statement No. 21, September 13, 2013), and the title “Net income (loss)” has been changed to “Net income (loss) attributable to owners of parent.”
6. Short-term liabilities = Short-term debt + Current portion of long-term debt
7. Net income (loss) per share (primary) is based on the average number of shares outstanding during the fiscal year. Net assets per share is calculated using the number of shares outstanding as of the balance sheet date. Net Income (loss) per share is calculated before dilution.
Shiseido Company, Limited, and SubsidiariesFor the fiscal periods ended March 31, 2007 to December 31, 2016
11-Year Summary of Selected Financial Data
¥670,701
168,692
457,550
44,458
65,576
12,790
¥739,120
16,361
181,155
197,517
320,127
¥ 67,586
(30,303)
(39,571)
88,592
¥ 32.1
772.1
50.0
397,864
6.6
1.7
6.1
3.9
41.6
32.8
0.64
38.2
155.5
31,310
¥21.4
¥694,594
185,532
459,056
50,005
78,836
25,293
¥739,832
66,144
61,694
127,838
403,796
¥ 69,431
(18,482)
1,836
145,259
¥ 60.9
940.8
32.0
412,572
7.2
3.6
7.4
6.6
52.5
30.6
0.33
24.0
52.6
27,460
¥25.3
¥723,484
186,466
473,553
63,465
94,960
35,459
¥675,864
38,653
24,566
63,219
399,738
¥ 75,307
(5,802)
(95,882)
120,393
¥ 86.1
946.2
34.0
407,696
8.8
5.0
9.4
9.2
56.6
39.1
0.17
13.7
39.5
28,793
¥25.1
¥644,201
160,166
433,684
50,350
75,699
33,671
¥775,445
112,693
101,753
214,446
365,207
¥ 69,431
(204,884)
120,359
77,157
¥ 84.6
875.7
50.0
397,886
7.8
4.9
7.5
9.8
44.9
45.4
0.62
37.0
59.1
28,968
¥22.2
¥690,256
171,752
468,589
49,914
75,077
19,373
¥606,568
27,601
34,451
62,053
351,951
¥ 42,767
(28,157)
(32,283)
91,857
¥ 48.0
839.9
50.0
403,240
7.2
3.0
8.2
5.4
55.6
23.6
0.18
15.0
104.1
28,810
¥24.0
Data Section
70
8. Operating ROA = (Operating income + Interest and dividend income) / Total assets (Yearly average)
9. Interest coverage ratio = Net cash provided by operating activities / Interest paid* *Interest paid is as stated in the consolidated statements of cash flows.
10. Debt-equity ratio = Interest-bearing debt / Equity* *Equity = Total net assets – Stock acquisition rights – Non-controlling interests in consolidated subsidiaries
11. Interest-bearing debt ratio = Interest-bearing debt / Invested capital* *Invested capital = Interest-bearing debt + Total net assets
12. The number of employees at year-end does not include temporary employees.
13. Shiseido Group subsidiaries in the Americas formerly recognized samples and promotional items associated with marketing activities at stores as assets when acquired and expensed them when shipped to customers. However, effective the fiscal year ended March 31, 2012 these subsidiaries began to expense these items when acquired as part of efforts to stan-dardize Group accounting policies. The Shiseido Group applied this change retrospectively and restated the consolidated financial statements for the fiscal year ended March 31, 2011 accordingly.
14. Effective the fiscal year ended March 31, 2014, the Shiseido Group applied Employee Benefits (IAS 19, amended June 16, 2013) to certain consolidated subsidiaries and changed the method for recognizing changes in net defined benefit obligation. The Shiseido Group applied this change retrospectively and restated the consolidated financial statements for the fiscal year ended March 31, 2013 accordingly.
15. From the year ended December 2016, Shiseido has been recognizing long-term payables associated with Dolce&Gabbana. For the year ended December 2016, the interest-bearing debt ratio including these long-term payables was 29.8 percent, the debt-equity ratio was 0.45 and interest-bearing debt was ¥175,832 million.
2012/3 2013/3 2014/3 2015/3 2015/12 2016/12 2016/12
Thousands of U.S. dollars(Except per share data)
Millions of yen(Except per share data)
¥682,385
162,989
480,260
39,135
76,974
14,515
¥720,707
9,734
175,418
185,153
303,715
¥ 52,599
(20,668)
(35,482)
82,974
¥ 36.5
729.9
50.0
397,974
5.7
2.0
5.6
4.9
40.3
27.3
0.64
37.9
137.1
32,595
¥20.9
¥677,727
166,783
484,898
26,045
61,463
(14,685)
¥715,593
39,394
145,274
184,669
303,153
¥ 42,040
(25,534)
(24,745)
80,253
¥ (36.9)
721.2
50.0
398,007
3.8
(2.0)
3.8
(5.1)
40.1
22.5
0.64
37.9
—
33,356
¥20.3
¥762,047
189,559
522,843
49,644
91,285
26,149
¥801,346
64,054
91,864
155,918
358,707
¥ 84,320
(16,799)
(47,462)
110,163
¥ 65.7
849.4
20.0
398,300
6.5
3.4
6.8
8.4
42.2
47.5
0.46
30.3
30.5
33,054
¥23.1
¥777,687
196,433
553,640
27,613
90,703
33,668
¥823,636
75,615
31,281
106,897
409,369
¥ 32,134
11,538
(58,419)
100,807
¥ 84.4
970.0
20.0
398,704
3.6
4.1
3.6
9.4
47.0
24.2
0.28
20.7
23.7
33,000
¥23.6
¥850,306
207,553
605,972
36,780
90,078
32,101
¥946,007
19,403
156,428
120,580
413,870
¥ 59,129
(70,640)
22,378
113,122
¥ 80.4
984.1
20.0
399,227
4.3
3.4
4.3
8.2
41.5
70.5
0.31
22.6
24.9
36,549
¥23.2
¥763,058
196,009
529,388
37,660
80,635
23,210
¥808,547
18,996
67,617
86,613
413,334
¥ 60,529
(23,137)
(30,151)
104,926
¥ 58.2
981.4
20.0
399,026
4.9
2.8
4.8
6.0
48.4
71.7
0.22
17.3
34.4
33,783
¥22.6
$7,296,884
1,781,112
5,200,137
315,626
773,002
275,474
$8,118,141
166,506
1,342,383
1,034,754
3,551,617
$ 507,414
(606,195)
192,036
970,754
$ 0.68
8.44
0.17
$199
71
72
FinancialSection
72
73 Operating Results and Financial Condition
82 Consolidated Financial Statements
87 Notes to the Consolidated Financial Statements
109 Independent Auditor’s Report
73
Operating Results and Financial Condition
Net Sales
Consolidated net sales for the fiscal year ended December 31,
2016 increased 5.2 percent on a local currency basis compared
with the 12 months ended December 31, 2015. Growth came mainly
from higher sales in the prestige category in each region and addi-
tional sales from newly acquired brands. Translated into yen,
consolidated net sales decreased 1.5 percent to ¥850,306 million
($7,296,884 thousand) due to the significant foreign exchange
impact from the appreciation of the yen.
Net Sales(Billions of yen) 2013/3 2014/3 2015/3 2015/3
(Adjusted) 2015/12 2015/12(Adjusted) 2016/12
Net Sales 677.7 762.0 777.7 677.5 763.1 863.3 850.3
Cost of Sales and Selling, General and
Administrative Expenses
Cost of Sales
Cost of sales decreased 4.0 percent year on year to ¥207,553 million
($1,781,112 thousand). The ratio of cost of sales to net sales
decreased 0.7 percentage points to 24.4 percent. Sales in Japan have a
lower ratio of cost of sales to net sales and accounted for a larger
proportion of net sales. Additional factors included improvements in the
product mix through increased sales of prestige brands and the effect of
cost structure reforms.
Selling, General and Administrative Expenses
Selling, general and administrative (SG&A) expenses increased 0.5
percent year on year to ¥605,972 million ($5,200,137 thousand). Details
of SG&A expenses are as follows:
Marketing Costs
The ratio of marketing costs to net sales increased 0.1 percentage
points to 36.3 percent. Key factors were investments in growth to rebuild
the business foundation and increased investment in new brands.
Personnel Expenses
The ratio of personnel expenses to net sales increased 0.1 percent-
age points to 13.2 percent. The main factor for the increase was higher
retirement benefits recognized in Japan.
Other Expenses
The ratio of other expenses to net sales increased 1.3 percentage
points to 21.8 percent due largely to costs associated with brand
acquisitions and license agreements. R&D expenses, which are
included in SG&A expenses, were ¥18,264 million ($156,732
thousand) and represented 2.1 percent of net sales.
Effective from the previous fiscal period, Shiseido and consolidated
subsidiaries in Japan changed their balance sheet dates from March 31
to December 31. Following this change, the accounting period of the
previous fiscal period was nine months from April 1, 2015 to December
31, 2015. Year-on-year changes in amounts and percentages in the fol-
lowing analysis are comparisons for reference between the 12 months
ended December 31, 2016 and the 12 months ended December 31,
2015.
Despite signs of weakness in certain areas, moderate economic
recovery continued in Japan during the fiscal year ended December 31,
2016, supported by factors including improvement in the employment
environment. The domestic cosmetics market continued to expand,
benefiting from improved business confidence and an increase in the
number of tourists from overseas. Outside Japan, the European cosmet-
ics market grew moderately despite varying performance from country to
country, while the markets of China, Asia and the Americas continued to
expand steadily.
In the fiscal period ended December 31, 2015, the Shiseido Group
launched its VISION 2020 medium-to-long-term strategy for remaining
vital for the next 100 years. As a company that is transforming “from a
leader in Japan to a winner worldwide,” we have shifted to a consumer-
oriented focus for all activities and are working diligently to globally
enhance our brand value. We have positioned the three years that began
from the fiscal period ended December 31, 2015 as a period for rebuild-
ing our business foundation to generate outstanding growth over the
three-year period that will commence from the fiscal year ending
December 31, 2018. In addition to undertaking aggressive investment,
we are establishing a foundation to accelerate growth.
In the fiscal year ended December 31, 2016, the Shiseido Group
adopted a matrix organization that encompasses five brand categories
and six regions. This matrix organization is built on the concept “Think
Global, Act Local,” which involves tailoring activities to particular regions
in response to changes in each country while conducting Group-wide
management and promoting marketing, brand and other strategies with a
global perspective. Under this matrix, the Company has delegated broad
authority and responsibilities to each region, and enhanced its ability to
respond to consumer needs that differ from market to market. We
strengthened marketing and innovation with a strategic focus on enhanc-
ing brand value. We also concentrated on implementing measures to uti-
lize diverse human resources and to help our people improve their skills,
while building and strengthening our global organization. Moreover, we
ramped up investments in the global prestige category to further acceler-
ate growth. In July 2016, we acquired Laura Mercier, a prestige brand
mainly in the makeup category, and RéVive, a prestige skincare brand. In
October 2016, we commenced sales under a license agreement with the
Italian luxury fashion brand company Dolce&Gabbana S.r.l. to develop,
manufacture and sell fragrance, makeup and skincare products.
Operating Results
74
statements of income are ¥108.9 per U.S. dollar, ¥120.4 per euro, and
¥16.4 per Chinese yuan.
Net Income (Loss) Attributable to Owners of Parent/Return on Equity
(Billions of yen) 2013/3 2014/3 2015/3 2015/3(Adjusted) 2015/12 2015/12
(Adjusted) 2016/12
Net Income (Loss) Attributable toOwners of Parent
(14.7) 26.1 33.7 27.5 23.2 29.5 32.1
ROE (%) (5.1) 8.4 9.4 — 6.0 — 8.2
Note: Consolidated ROE for the fiscal period ended December 31, 2015 is calculated using consolidated net income attributable to owners of parent for the year as the numerator and the average of equity at March 31, 2015 and December 31, 2015 as the denominator.
Review by Reportable Segment
Change in Business Segment Classification
Effective from the fiscal year ended December 31, 2016, reportable seg-
ment classifications have been changed from the “Japan Business” and
“Global Business” segments to the “Japan Business,” “China Business,”
“Asia Pacific Business,” “Americas Business,” “EMEA Business” and
“Travel Retail Business” segments in accordance with changes in the
organizational structure of the Shiseido Group. Segment information for
the corresponding period of the previous fiscal year has been restated in
line with changes in the method of classifying reportable segments.
Japan Business
The Japan Business grew steadily during the fiscal year ended
December 31, 2016. Factors included consumer-oriented brand innova-
tion, the selection and concentration of marketing investment, and
increased inbound sales due to initiatives to earn the business of tourists
visiting Japan with a focus on airport duty-free and department stores. In
the prestige category, results for the clé de peau BEAUTÉ luxury brand were
especially strong. SHISEIDO also captured greater market share due to
a significant increase in sales largely driven by robust results for the
ULTIMUNE power infusing concentrate, which helps to draw out the
skin’s natural beauty. In the cosmetics category, sales of the mid-priced
ELIXIR skincare, MAQuillAGE makeup and ANESSA sunscreen brands
once again increased year on year. Meanwhile, for low-priced products,
which are mainly in the personal care category, we introduced new items
and actively engaged in marketing activities. However, sales decreased
year on year due to the increasingly competitive environment.
As a result of the above factors, segment sales increased 2.9 percent
year on year to ¥407,628 million ($3,498,052 thousand). While aggres-
sive marketing investment continued, operating income grew 4.4 percent
year on year to ¥57,417 million ($492,722 thousand) largely because of
higher marginal income due to the increase in sales, improvements in
the product mix, and the effects of cost structure reforms.
China Business
China Business sales increased mainly in the prestige and e-com-
merce categories. In the prestige category in particular, the contribution
from SHISEIDO, clé de peau BEAUTÉ and IPSA supported stronger growth
than that of competitors in the department store channel. E-commerce
sales growth also substantially outpaced market growth due to initia-
tives to capture increasing demand as the market expands, such as
Cost of Sales Ratio/SG&A Expenses Ratio/SG&A Expenses2013/3 2014/3 2015/3 2015/3
(Adjusted) 2015/12 2015/12(Adjusted) 2016/12
Cost of Sales Ratio (%) 24.6 24.9 25.2 26.0 25.7 25.1 24.4
SG&A Expenses Ratio (%) 71.6 68.6 71.2 70.9 69.4 69.8 71.3
Marketing Costs 23.5 22.2 23.4 24.7 25.2 36.2 36.3
Personnel Expenses 24.7 23.9 24.5 27.3 25.7 13.1 13.2
Other Expenses 23.4 22.5 23.3 18.9 18.5 20.5 21.8
SG&A Expenses (Billions of yen) 484.9 522.8 553.6 480.1 529.4 602.7 606.0
Marketing Costs 159.0 169.3 182.2 167.0 192.1 312.1 308.8
Personnel Expenses 167.7 181.8 190.6 185.2 196.0 113.5 112.0
Other Expenses 158.2 171.7 180.8 127.9 141.3 177.1 185.2
Note: From the fiscal period ended December 31, 2015, counter depreciation expenses and costs of BCs previously included in other expenses and personnel expenses have been reclassified as marketing costs.
Operating Income
Operating income decreased 17.0 percent year on year to ¥36,780
million ($315,626 thousand) due to factors such as one-time costs
associated with brand acquisitions, license agreements, and structural
reform of Bare Escentuals, Inc. in the United States and the greater-than-
expected impact from the appreciation of the yen. The increase in net
sales, improvements in the product mix through increased sales of
prestige brands, the effect of cost structure reforms and other factors
partially offset the decrease.
Operating Income/Operating Profitability(Billions of yen) 2013/3 2014/3 2015/3 2015/3
(Adjusted) 2015/12 2015/12(Adjusted) 2016/12
Operating Income 26.0 49.6 27.6 21.2 37.7 44.3 36.8
Operating Profitability (%) 3.8 6.5 3.6 3.1 4.9 5.1 4.3
Other Income (Expenses)
Net other income increased to ¥13,087 million ($112,305
thousand). This was largely due to extraordinary gains from the sale
of intellectual property rights in connection with the Jean Paul
GAULTIER fragrance business and the sale of land at the closed
Kamakura Factory.
Income before Income Taxes
Income before income taxes decreased 6.1 percent year on year to
¥49,866 million ($427,924 thousand).
Income Taxes, Including Deferred Taxes
Income taxes, including deferred taxes, decreased 24.9 percent year
on year to ¥15,941 million ($136,797 thousand).
Net Income Attributable to Non-Controlling Interests
Net income attributable to non-controlling interests decreased 24.2
percent year on year to ¥1,823 million ($15,644 thousand).
Net Income Attributable to Owners of Parent
Net income attributable to owners of parent increased 9.0
percent year on year to ¥32,101 million ($275,474 thousand).
Consolidated operating profitability was 4.3 percent. Consolidated
return on equity (ROE) was 8.2 percent.
The major foreign currency rates applicable to the consolidated
75
marketing collaboration with a major local online site operator. At the
same time, we installed new AUPRES counters and renewed
PURE&MILD to address the issues we have with our locally produced
mid-priced brands, but the effect of these initiatives was limited.
As a result of the above factors, segment sales increased 11.4 per-
cent year on year on a local currency basis. Translated into yen, seg-
ment sales decreased 4.2 percent year on year to ¥120,479 million
($1,033,888 thousand). Operating income was ¥4,166 million
($35,750 thousand), compared with an operating loss of ¥476 million
for the 12 months ended December 31, 2015. Although marketing
investments and personnel expenses increased, we returned to oper-
ating profitability largely as a result of increased marginal income due
to higher sales and lower cost of sales due to an improved product mix.
Asia Pacific Business
In the Asia Pacific Business, the regional headquarters located in
Singapore fully exercised its supervisory and marketing functions to
execute activities rooted even more deeply in the communities of the
countries we serve. The Asia Pacific Business generated steady growth,
supported by the growth in sales of prestige brands including SHISEIDO,
clé de peau BEAUTÉ and NARS mainly in Thailand, Vietnam, and the
contribution from NARS and personal care brand SENKA in South
Korea. SENKA sales were also strong in other countries due to collabor-
ative research into cosmetics behavior by the regional headquarters
and the SENKA brand holder to develop country-specific advertising that
resonates with consumers, as well as an increase in marketing channels
and the number of stores that handle the SENKA brand.
As a result of the above factors, segment sales increased 7.0 percent
year on year on a local currency basis. Translated into yen, however, sales
decreased 5.9 year on year to ¥49,633 million ($425,924 thousand).
Operating income increased 171.8 percent year on year to ¥1,102 million
($9,456 thousand) largely because of increased marginal income due to
higher sales.
Americas Business
The Americas Business focused on the prestige category and
increased marketing investments. We acquired the Laura Mercier brand
in July 2016 to strengthen our brand portfolio and increase our share
Income by Reportable Segment (before Amortization of Goodwill)Former segments New segments1 New segments2
(Billions of yen) 2013/3 2014/3 2015/3 (Billions of yen)2015/3
(Adjusted) 2015/12 (Billions of yen)2015/12(Adjusted) 2016/12
Domestic Cosmetics Business 27.7 39.6 30.2 Japan Business 20.2 30.6 Japan Business 55.1 57.8
Global Business 2.1 12.1 (0.1) Global Business 2.7 7.2 China Business (0.0) 4.6
Others 2.0 2.1 2.2 Others 3.1 4.9 Asia Pacific Business 0.5 1.2
Americas Business 3.8 (2.9)
EMEA Business 4.6 (6.3)
Travel Retai Business 2.4 5.5
Income by Reportable Segment (after Amortization of Goodwill)
Former segments New segments1 New segments2
(Billions of yen) 2013/3 2014/3 2015/3 (Billions of yen)2015/3
(Adjusted) 2015/12 (Billions of yen)2015/12(Adjusted) 2016/12
Domestic Cosmetics Business 27.5 39.5 30.0 Japan Business 20.1 30.5 Japan Business 55.0 57.4
Global Business (3.3) 7.7 (4.7) Global Business (1.9) 2.1 China Business (0.5) 4.2
Others 2.0 2.1 2.2 Others 3.1 4.9 Asia Pacific Business 0.4 1.1
Americas Business (5.6) (11.8)
EMEA Business 4.6 (7.2)
Travel Retail Business 2.4 5.5
Net Sales by Reportable SegmentFormer segments New segments1 New segments2
(Billions of yen) 2013/3 2014/3 2015/3 (Billions of yen)2015/3
(Adjusted) 2015/12 (Billions of yen)2015/12(Adjusted) 2016/12
Domestic Cosmetics Business 345.9 349.7 339.3 Japan Business 240.5 266.8 Japan Business 396.0 407.6
Global Business 322.3 402.2 427.9 Global Business 424.3 478.8 China Business 125.7 120.5
Others 9.5 10.1 10.5 Others 12.7 17.5 Asia Pacific Business 52.7 49.6
Total 677.7 762.0 777.7 Total 677.5 763.1 Americas Business 167.5 162.6
EMEA Business 104.2 85.2
Travel Retail Business 17.2 24.8
Notes: 1. The Company partially revised its reportable segment classification method effective from the fiscal period ended December 31, 2015. Accordingly, the “Domestic Cosmetics Business” and “Global Business” segments were reclassified as the “Japan Business” and “Global Business” segments, respectively. Taking into account this change, certain subsidiaries previously included in the “Domestic Cosmetics Business” segment were reallocated to the “Global Business” and “Others” segments. Moreover, in order to more accurately grasp actual operating results in each segment, the allocation method for certain expenses has also been revised. Income and expenses for 2015/3 (Adjusted) (the corresponding period of the previous fiscal period) have been adjusted to conform to the new reportable segment classification and expense allocation methods.
2. Change in Business Segment Classification Effective from the fiscal year ended December 31, 2016, reportable segment classifications have been changed from the “Japan Business” and “Global Business” segments
to the “Japan Business,” “China Business,” “Asia Pacific Business,” “Americas Business,” “EMEA Business” and “Travel Retail Business” segments in accordance with changes in the organizational structure of the Shiseido Group. Segment information for the corresponding period of the previous fiscal year has been restated in line with changes in the method of classifying reportable segments.
76
of the makeup market, which is growing mainly in the United States. In
addition, Bare Escentuals, Inc. moved its headquarters functions from
San Francisco to New York, where our regional headquarters’ supervi-
sory and marketing functions are located. Our organization is now more
integrated and better able to share prestige marketing knowledge
throughout the region and fully reinforce brands. We also strengthened
digital marketing to address the rapidly growing e-commerce market.
As a result of the above factors, segment sales increased 8.0
percent year on year on a local currency basis. Sales benefitted from
the continued growth of SHISEIDO, NARS and clé de peau BEAUTÉ, and
from newly acquired brands. Translated into yen, sales decreased 3.0
percent year on year to ¥162,556 million ($1,394,971 thousand).
Operating loss was ¥11,813 million ($101,373 thousand). Factors included
increased marketing investments, structural reform expenses at Bare
Escentuals, Inc., and one-time costs and the amortization of goodwill
associated with the acquisition of brands.
EMEA Business
The EMEA Business increased marketing investments to enhance
the value of brands including SHISEIDO and designer fragrances narciso
rodriguez and ISSEY MIYAKE. We also concluded a license agreement
with the leading Italian luxury fashion company Dolce&Gabbana S.r.I. to
increase market share in the fragrance market, which is largest in
Europe. In addition, the EMEA Business relocated its regional head-
quarters’ supervisory and marketing functions to central Paris to
enhance both growth potential and profitability by integrating the
organizations and functions of each country within the region, elimi-
nating duplication among the cosmetics and fragrance categories to
uniformly develop business.
Despite the steady growth in sales of SHISEIDO and narciso
rodriguez, the loss of Jean Paul GAULTIER sales due to the termination
of the license agreement at the beginning of the fiscal year ended
December 31, 2016 significantly affected segment sales, which
decreased 8.1 percent year on year on a local currency basis.
Translated into yen, sales decreased 18.2 percent year on year to
¥85,215 million ($731,270 thousand). Operating loss was ¥7,224 mil-
lion ($61,992 thousand), compared with operating income of ¥4,597
million for the 12 months ended December 31, 2015. Factors included
reduced marginal income due to lower sales, and one-time costs asso-
ciated with the Dolce&Gabbana license agreement. Excluding the
impact of the Jean Paul GAULTIER license termination and the
Dolce&Gabbana license acquisition, sales increased 9.0 percent on a
local currency basis.
Travel Retail Business
The Travel Retail Business includes the sale of cosmetics through
channels such as airport duty-free stores, and serves a growing market
centered on Asia. Shiseido is stronger than other brands originating in
Japan in the travel retail market, which has high profit margins and con-
siderable growth potential. However, since segment sales account for
a small proportion of net sales compared with competitors worldwide,
we are aggressively developing travel retail as a key business. During
the fiscal year ended December 31, 2016, we opened new counters,
improved consumer services at existing locations, introduced dedicat-
ed products for Travel Retail, and reinforced relationships with major
retailers.
Sales per store increased as a result, mainly at major airport duty-
free stores in China, South Korea, Thailand and elsewhere in Asia, and
overall growth substantially exceeded the market. Segment sales
increased 60.4 percent year on year on a local currency basis.
Translated into yen, sales increased 44.2 percent year on year, to
¥24,793 million ($212,760 thousand). Operating income increased
126.8 percent year on year to ¥5,470 million ($46,940 thousand)
largely because of increased marginal income due to higher sales.
Profitability by Reportable Segment (before Amortization of Goodwill)Former segments New segments1 New segments2
(%) 2013/3 2014/3 2015/3 (%) 2015/3(Adjusted) 2015/12 (Billions of yen)
2015/12(Adjusted) 2016/12
Domestic Cosmetics Business 8.0 11.3 8.8 Japan Business 8.2 11.1 Japan Business 12.6 12.7
Global Business 0.6 3.0 (0.0) Global Business 0.6 1.5 China Business (0.0) 3.8
Others 13.4 13.8 14.6 Others 13.5 17.5 Asia Pacific Business 0.9 2.3
Americas Business 2.2 (1.7)
EMEA Business 4.2 (7.0)
Travel Retail Business 14.0 22.1
Profitability by Reportable Segment (after Amortization of Goodwill)
Former segments New segments1 New segments2
(%) 2013/3 2014/3 2015/3 (%) 2015/3(Adjusted) 2015/12 (Billions of yen)
2015/12(Adjusted) 2016/12
Domestic Cosmetics Business 7.9 11.2 8.8 Japan Business 8.1 11.1 Japan Business 12.6 12.6
Global Business (1.0) 1.9 (1.1) Global Business (0.4) 0.4 China Business (0.4) 3.5
Others 13.4 13.8 14.6 Others 13.5 17.5 Asia Pacific Business 0.8 2.2
Americas Business (3.1) (6.8)
EMEA Business 4.2 (8.1)
Travel Retail Business 14.0 22.1
Note: Net profitability by reportable segment is calculated against sales for the segment, including intersegment sales.
77
Operating Results and Financial Condition
Financing and Liquidity Management
The Shiseido Group seeks to generate stable operating cash flow
and ensure a wide range of funding methods with the aims of secur-
ing sufficient capital for operating activities and maintaining sufficient
liquidity and a sound financial position. We fund working capital, capital
expenditures, and investments and loans needed for sustainable
growth primarily with cash on hand and operating cash flow supple-
mented by bank borrowings and bond issues. Shiseido has set a bench-
mark of 25 percent for the interest-bearing debt ratio to maintain finances
at a level that enables access to capital on favorable terms. Shiseido
meets its funding requirements for large-scale investments using opti-
mum, timely methods given factors including operating status, financial
position and market environment.
One of our targets for short-term liquidity is to maintain cash on
hand at a level of approximately 1.5 months of consolidated net sales.
As of December 31, 2016, cash, time deposits and short-term invest-
ments in securities totaled ¥128,032 million ($1,098,704 thousand)
and represented 1.8 months of consolidated net sales for the fiscal
year ended December 31, 2016.
Interest-bearing debt as of December 31, 2016 totaled ¥120,580
million ($1,034,754 thousand).* Shiseido uses diversified funding
methods, which include an unused shelf registration in Japan for ¥140.0
billion ($1,201,407 thousand) of straight bonds. In addition, Shiseido
Co., Ltd. and two subsidiaries in Europe and the United States have
established a syndicated loan program with unused commitments totaling
$300 million. A subsidiary in the United States has also established an
unused commercial paper program totaling $55 million. As of December
31, 2016, Shiseido maintained a sufficient level of liquidity and a high
level of financial flexibility because of its diversified funding methods.
* From the year ended December 2016, Shiseido has been recognizing long-term payables associated with Dolce&Gabbana. For the year ended December 2016, the interest-bearing debt including these long-term payables was ¥175,832 million ($1,508,898 thousand).
Cash Flows
Cash and cash equivalents (net cash) as of December 31, 2016
totaled ¥113,122 million ($970,754 thousand), an increase of ¥8,196
million compared with December 31, 2015.
Cash Flows Summary
(Billions of yen) 2015/3 2015/12 2016/12
Cash Flows from Operating Activities 32.132.1 60.5 59.1
Cash Flows from Investing Activities 11.511.5 (23.1) (70.6)
Cash Flows from Financing Activities (58.4)(58.4) (30.2) 22.4
Cash and Cash Equivalents at End of Period 100.8100.8 104.9 113.1
Cash Flows from Operating Activities
Net cash provided by operating activities was ¥59,129 million
($507,414 thousand). Income before income taxes was ¥49,866 million
($427,924 thousand), depreciation was ¥34,480 million ($295,889
thousand), amortization of goodwill was ¥4,916 million ($42,186 thou-
sand), and increase in notes and accounts payable was ¥19,058 mil-
lion ($163,545 thousand). On the other hand, increase in notes and
accounts receivable was ¥10,578 million ($90,774 thousand),
increase in inventories was ¥9,500 ($81,524 thousand), gain on trans-
fer of business was ¥8,952 million ($76,821 thousand) and income
taxes paid totaled ¥16,415 million ($140,865 thousand).
Cash Flows from Investing Activities
Net cash used in investing activities was ¥70,640 million ($606,195
thousand). Proceeds from transfer of business provided ¥10,938 mil-
lion ($93,864 thousand). On the other hand, acquisition of property,
plant and equipment used ¥31,366 million ($269,166 thousand),
acquisition of intangible assets used ¥32,340 million ($277,525 thou-
sand), and acquisition of shares in subsidiaries resulting in change in
scope of consolidation used ¥24,426 million ($209,611 thousand).
Cash Flows from Operating Activities/Capital Expenditures1
(Billions of yen) 2013/3 2014/3 2015/3 2015/12 2016/12
Cash Flows from Operating Activities 42.0 84.3 32.1 60.5 59.1
Capital Expenditures 1 29.7 28.3 26.8 32.4 44.8
Notes: 1. Property, plant and equipment + Intangible assets + Long-term prepaid expenses
2. Trademarks are excluded from intangible fixed asset capital expenditures.
Cash Flows from Financing Activities
Net cash provided by financing activities was ¥22,378 million
($192,036 thousand). Proceeds from long-term debt provided ¥30,000
million ($257,444 thousand) including proceeds from issuance of
bonds of ¥10,000 million ($85,814 thousand). On the other hand,
repayment of long-term debt used ¥5,738 million ($49,240 thousand)
and cash dividend paid used ¥8,214 million ($70,488 thousand).
Assets, Liabilities and Net Assets
Assets
As of December 31, 2016, total assets increased 17.0 percent compared
with December 31, 2015 to ¥946,007 million ($8,118,141 thousand).
Current assets increased 8.1 percent compared with December 31,
2015 to ¥443,748 million ($3,808,015 thousand). Non-current assets
(fixed assets) increased 26.2 percent compared with December 31, 2015
to ¥502,258 million ($4,310,117 thousand) largely due to an increase in
intangible assets associated with the acquisition of brands, including
Laura Mercier, and with the Dolce&Gabbana license agreement.
Liabilities
Total liabilities as of December 31, 2016 increased 34.6 percent
compared with December 31, 2015 to ¥532,137 million ($4,566,523
thousand), reflecting long-term payables associated with the
Dolce&Gabbana license agreement and increased debt.
Net Assets
Total net assets as of December 31, 2016 increased 0.1 percent
compared with December 31, 2015 to ¥413,870 million ($3,551,617
thousand), mainly due to an increase in shareholders’ equity.
Liquidity and Capital Resources
78
Total Assets/Operating ROA(Billions of yen) 2013/3 2014/3 2015/3 2015/12 2016/12
Total Assets 715.6 801.3 823.6 808.5 946.0
Operating ROA (%) 3.8 6.8 3.6 4.8 4.3
Net Assets/Interest-Bearing Debt(Billions of yen) 2013/3 2014/3 2015/3 2015/12 2016/12
Net Assets 303.2 358.7 409.4 413.3 413.9
Interest-Bearing Debt 184.7 155.9 106.9 86.6 120.6*
Equity Ratio/Interest-Bearing Debt Ratio(%) 2013/3 2014/3 2015/3 2015/12 2016/12
Equity Ratio 40.1 42.2 47.0 48.4 41.5
Interest-Bearing Debt Ratio 37.9 30.3 20.7 17.3 22.6*
* From the year ended December 2016, Shiseido has been recognizing long-term payables associated with Dolce&Gabbana. For the year ended December 2016, the interest-bearing debt ratio including these long-term payables was 29.8 percent, and interest-bearing debt was ¥175,832 million ($1,508,898 thousand).
As of December 31, 2016, net assets per share increased ¥2.77
($0.02) compared with December 31, 2015 to ¥984.13 ($8.45).
The equity ratio decreased 6.9 percentage points to 41.5 percent.
Credit Ratings
Shiseido recognizes the need to maintain a certain level of credit
rating to secure financial flexibility that is consistent with our capital/
liquidity policies and to secure access to sufficient capital resources
through capital markets. Shiseido has acquired ratings from Moody’s
Japan K.K. (Moody’s) and Standard and Poor’s Ratings Japan K.K.
(S&P) to facilitate fund procurement in global capital markets.
Moody’s S&P
Long-term A2 (Outlook: Stable) A- (Outlook: Stable)
Short-term P−1 A−2
(As of February 28, 2017)
Forecast for the Year Ending December 31, 2017
(Announced on February 9, 2017)
2017/12 (Estimate)
Year-on-yearincrease (decrease)
2016/121 (Results)% Change % change in local
currency terms
Net Sales 940.0 10.5% 11% 850.3
Japan Business 391.0 2.6% 3% 381.2
China Business 132.0 11.8% 14% 118.1
Asia Pacific Business 48.5 6.4% 6% 45.6
Americas Business 164.0 19.3% 19% 137.5
EMEA Business 111.0 31.9% 34% 84.1
Travel Retail Business 32.5 31.0% 30% 24.8
Professional Business 47.0 4.5% 4% 45.0
Other2 14.0 0% 0% 14.0
Operating Income 45.5 23.7% — 36.8
Net Income Attributable to Owners of Parent 26.0 -19.0% — 32.1
Notes: 1. Effective from the fiscal year ending December 31, 2017, the Company has revised its reportable segment classification method in line with changes to its organizational system. Under this change, plans are in place to reclassify the Company’s reportable segments into the “Japan Business,” “China Business,” “Asia Pacific Business,” “Americas Business,” “EMEA Business,” “Travel Retail Business” and “Professional Business.” Meanwhile, operating results data for the fiscal year under review has been rearranged using the simplified method.
2. “Other” refers to the operations of business segments not included in reportable segments and is comprised of manufacturing operations and the activities of the Frontier Science and Restaurant businesses.
Despite expectations that the global economy as a whole will continue
to recover moderately during the fiscal year ending December 31,
2017, future conditions remain uncertain. U.S. trade and financial poli-
cies, political events in Europe, and economic conditions in Asia are
among factors that may impact operating conditions.
Under these circumstances, Shiseido will continue to rebuild its busi-
ness foundation to achieve the targets identified under the medium-to-
long-term strategy VISION 2020. Specifically, the Group is targeting
high growth by adopting a selection and concentration approach toward
prestige brands, brands that are made in Japan, digital, e-commerce
and other categories expected to expand in the future. Shiseido will
rigorously manage returns by brand to improve profitability, and will
implement initiatives including efforts to turn around underperforming
brands and conduct a bold review of businesses and the brand portfo-
lio. The Group will creatively strengthen brands through innovation by
actively employing the Centers of Excellence to cultivate strong brands
that can excel globally. Centers of Excellence is a concept under which
regions that are at the forefront of categories and have the ability to
influence them globally will lead the Group in collecting information, for-
mulating strategy, developing products and other initiatives for shared
use in marketing operations worldwide. Japan will host the Center of
Excellence for skincare, the United States for makeup and digital mar-
keting, and Europe for fragrances. In addition, the Group will invest in
emerging companies in leading-edge businesses to gain access to
innovative technologies and ideas and promote open innovation that
drives the development of high-value-added products. The Company will
support these initiatives by nurturing and recruiting human resources
globally while building mechanisms that allow each and every employee
to make the most of their talents and potential.
We expect these initiatives to result in consolidated net sales for the
fiscal year ending December 31, 2017 of ¥940.0 billion. Operating
income is forecast to total ¥45.5 billion due to increased marginal
income as a result of higher sales. Net income attributable to owners
of parent is projected to be ¥26.0 billion.
Segment Forecast
In line with changes to its internal management classification
method, the Company has revised its reportable segments that com-
prised the “Japan Business,” “China Business,” “Asia Pacific Business,”
“Americas Business,” “EMEA Business” and “Travel Retail Business” into
the “Japan Business,” “China Business,” “Asia Pacific Business,” “Americas
Business,” “EMEA Business,” “Travel Retail Business” and “Professional
Business” from the fiscal year ending December 31, 2017.
The following segment outlook is based on this change of classification.
Forecast for the Fiscal Year Ending December 31, 2017
79
Operating Results and Financial Condition
Japan Business
In the Japan Business, we will build the robust prestige category by
increasing marketing investments and capturing inbound demand. We
will also enhance the strength of our brands in the cosmetics category
by increasing points of customer contact. We still have work to do in
low-priced categories, where we will thoroughly review strategies, rigor-
ously employ selection and concentration for categories and brands in
which the Group is strong, and use alliances with companies and collab-
oration with retailers to rebuild. We forecast that segment sales will
increase 3 percent year on year to ¥391.0 billion.
China Business
In the China Business, we will further strengthen the prestige category, in
which market share is steadily increasing. We will also increase investments
in the rapidly growing e-commerce market. Initiatives to address issues in
and reinforce the mid-priced cosmetics category will include a complete
renewal of AUPRES in March 2017 and the launch of ELIXIR as a skincare
brand that originated in Japan. We forecast that segment sales will increase
14 percent year on year on a local currency basis to ¥132.0 billion.
Asia Pacific Business
In the Asia Pacific Business, we will strengthen the prestige category
by aggressively investing in sales counters. We will roll out products
that are made in Japan in the cosmetics and personal care categories
and optimize communication with consumers by region to expand
sales. We forecast that segment sales will increase 6 percent year on
year on a local currency basis to ¥48.5 billion.
Americas Business
In the Americas Business, we will prioritize the rejuvenation of bare-
Minerals and will invest in Laura Mercier, NARS and other brands to fur-
ther enhance brand strength in the makeup category. We will also
improve profitability by increasing business efficiency within the region.
We forecast that segment sales will increase 19 percent year on year
on a local currency basis to ¥164.0 billion.
EMEA Business
In the EMEA Business, we began selling Dolce&Gabbana fragrances
and other products in October 2016 after licensing the brand earlier in
the year, and will substantially increase marketing investments in the
brand. We plan to transfer production to a Shiseido Group factory during
the first half of the fiscal year ending December 31, 2017, and expect
the profitability of the brand to improve substantially. We will also focus
investment on selected SHISEIDO brand lines. We will build the founda-
tion for enhanced profitability after integrating regional EMEA organiza-
tions. We forecast that segment sales will increase 34 percent year
on year on a local currency basis to ¥111.0 billion.
Travel Retail Business
The Travel Retail Business has exceptional potential for growth, and
we will aggressively increase investment in this priority business.
Specifically, we will focus on increasing the number of counters at
airports throughout the world, enhancing sales promotions, tailoring
marketing to the unique needs of travelers, and developing dedicated
products for Travel Retail. We forecast that segment sales will increase
30 percent year on year on a local currency basis to ¥32.5 billion.
Professional Business
In the Professional Business, we will continue to focus on strengthen-
ing the coloring category to accelerate growth in China and Asia. We fore-
cast that segment sales will increase 4 percent year on year on a
local currency basis to ¥47.0 billion.
Other
In the Frontier Science business, we will continue to focus on sales
of bio-hyaluronic acid, a raw material for pharmaceuticals and cosmet-
ics, and on sales of 2e and NAVISION cosmetics, derived from beauty
care skin research, for medical institutions. In the Restaurant business,
we will continue to develop menus that address customers’ tastes and
build business overseas, which began in Singapore last year. Segment
sales are forecast to be unchanged year on year at ¥14.0 billion.
We base our predictions on major currency exchange rates of ¥110
per U.S. dollar, ¥118 per euro, and ¥16 per Chinese yuan.
The various risks that could potentially affect the business performance
and financial position of Shiseido are summarized below. We feel that
these risks could have a major impact on investors’ decisions. Items that
deal with future events are based on our judgment as of March 28, 2017.
Please note that the potential risks are not limited to those listed below.
1. Decrease in Brand Value
Shiseido owns a range of symbolic brands such as SHISEIDO and
will continue working to enhance their brand value, but a decline in
brand value from an unforeseen event could negatively affect
Shiseido’s business performance and financial position.
Business and Other Risks
2. Consumer Services
Shiseido places high priority on its relationships with consumers.
The Shiseido Group corporate philosophy Our Mission, Values and Way
and the Shiseido Group Standards of Business Conduct and Ethics
clearly state that we shall act in a manner that earns the satisfaction
and trust of consumers, and we will continue working to ensure that all
employees are aware of these standards. However, an unforeseen event
could cause loss of such satisfaction and trust, leading to a decline in
the value of Shiseido brands. Shiseido’s business performance and
financial position could be negatively affected as a result.
3. Strategic Investment Activities
When making decisions about investments in strategic markets,
80
yen appreciates versus foreign currencies when revenues exceed expens-
es. Moreover, Shiseido’s investments in overseas subsidiaries and
equity affiliates are subject to foreign currency translation adjustments
that reduce shareholders’ equity if the yen appreciates. Foreign
exchange fluctuations that exceed assumptions could negatively affect
Shiseido’s business performance and financial position.
Share prices
As of December 31, 2016, Shiseido held investments in securities
and is therefore exposed to the risk of changes in share price, which
can increase or decrease unrealized gains or losses and expose
Shiseido to the risk of loss on revaluation. In addition, a portion of the
pension plan assets of Shiseido’s retirement benefit plan is invested in
listed shares. Lower share prices could therefore reduce pension plan
assets and negatively affect operating performance by increasing retire-
ment benefit expenses. Unforeseen situations could negatively affect
Shiseido’s business performance and financial position.
7. Responding Appropriately to Market Needs
Shiseido’s ability to develop and cultivate products and brands and
to conduct marketing activities that respond appropriately to market
needs exerts a significant impact on its sales and earnings. To respond
to market needs, we continuously develop appealing new products and
brands; reinforce and cultivate new and existing products and brands
through marketing activities; and withdraw existing products and brands
that no longer meet market needs. However, by nature these activities
entail uncertainties that may prevent Shiseido from achieving its intend-
ed results, which could negatively affect Shiseido’s business perfor-
mance and financial position.
8. Specific Business Partners
Significant changes are taking place in retail and wholesale distribution
channels. Failure to respond effectively to these changes could negatively
affect Shiseido’s business performance and financial position.
9. Regulatory Risk
Shiseido is subject to a range of domestic and overseas legal and
regulatory provisions in the course of conducting business. These
include Japan’s revised Pharmaceutical Affairs Law, as well as quality-
related standards, environmental standards, accounting standards, and
tax regulations. We aspire to be completely ethical based on legal
compliance and corporate social responsibility. However, future regula-
tory changes or the establishment of unanticipated new regulations
may limit Shiseido’s activities, which could negatively affect Shiseido’s
business performance and financial position.
10. Material Litigation
In the fiscal year ended December 31, 2016, Shiseido was not
involved in material litigation. In the future, unfavorable judgments
resulting from material litigation could negatively affect Shiseido’s busi-
ness performance and financial position.
11. Information Security Risk
Shiseido takes various measures aimed at protecting its information
assets, which include consumers’ personal information and industrial
mergers and acquisitions, and expansion in new businesses and new mar-
kets, Shiseido endeavors to collect sufficient information and undertake
due diligence prior to making rational judgments. Due to various unfore-
seeable factors that may cause the operating environment to deteriorate,
however, we may not achieve the results originally anticipated. This could
negatively affect Shiseido’s business performance and financial position.
4. Competitive Environment of the Cosmetics Industry
Shiseido operates in the cosmetics industry, in which competition is
intensifying on a global scale. Competition for share among Japanese
cosmetics companies in the mature domestic market is intensifying
because of factors including the expanding influence of global competi-
tors in the prestige market, and the entry of new competitors from other
industries. In addition, in overseas markets such as China and other
Asian countries, which Shiseido has positioned as central to its growth
strategy, the competitive environment is becoming increasingly challeng-
ing as global competitors are aggressively conducting mergers and acqui-
sitions and expanding market share by executing marketing activities to
raise consumer awareness of their brands. Consequently, inability to
respond to this competitive environment effectively could negatively
affect Shiseido’s business performance and financial position.
5. Overseas Business Activities
As of December 31, 2016, SHISEIDO was available in 88 countries
and regions including Japan, and overseas sales account for a growing
percentage of the Shiseido Group’s consolidated net sales each period.
In the course of conducting overseas business, Shiseido’s business
performance and financial position could be negatively affected by vari-
ous factors. These include the occurrence of sudden and unpredictable
economic, political and social crises; terrorism, war and civil war; eco-
nomic and civil upheaval resulting from the spread of contagious dis-
eases; natural disasters; and severe or abnormal weather.
6. Market Risk
Raw material prices
International market conditions affect the price of raw materials used
in Shiseido Group products. Factors affecting market conditions include
geopolitical risk, the impact on supply and demand from increasing
demand in developing countries and speculative capital flows, weather
abnormalities and changes in exchange rates. The Shiseido Group
constantly works to limit the impact of rising raw material prices by
reducing cost of sales and other means. However, changes in market
conditions and prices that exceed projections could negatively affect
the Shiseido Group’s business performance and financial position.
Exchange rates
Export, import and other transactions denominated in foreign
currencies expose Shiseido to foreign exchange rate risk. Although we
hedge foreign exchange rate risk through means such as limiting export
and import transactions by establishing production bases to serve local
markets, we are unable to completely eliminate risk. Moreover, the
financial statements of overseas consolidated subsidiaries and equity
affiliates are denominated in local currencies that are translated into
yen upon inclusion in the consolidated financial statements. This has
the potential to exert a negative impact on operating performance if the
81
Operating Results and Financial Condition
secrets. Specifically, in Japan we have formulated and rigorously com-
ply with our Personal Information Protection Rules for the handling of
individual number and specific personal information, Confidential
Information Controlling Regulation and Information System Controlling
Regulation to carefully handle personal consumer information and pro-
tect all information assets. Overseas, we have also established rules
based on the laws of the countries in which we operate. However,
unforeseeable events, such as leakage of information due to unauthor-
ized access, could negatively affect the Shiseido’s Group’s business
performance and financial position.
12. Natural Disasters and Accidents
Shiseido has developed a business continuity plan covering
issues critical to the continued operation of production bases, distri-
bution bases, information systems and the head office to minimize
loss due to interruption of production, distribution or sales resulting
from the occurrence of a natural disaster or accident, such as a
major earthquake. However, a natural disaster or accident that
exceeds the assumptions of this plan and disrupts production, dis-
tribution or sales could negatively affect Shiseido’s business perfor-
mance and financial position.
Signifi cant Accounting Estimates
Shiseido prepares its consolidated financial statements in
accordance with accounting principles generally accepted in Japan. In
preparing these financial statements, we select and apply accounting
policies and necessarily make estimates that affect the presentation of
reported amounts for assets, liabilities, revenue and expenses. We
consider information including historical data in making rational esti-
mates. However, due to the unpredictable nature of these estimates,
actual results may vary. Shiseido considers the following significant
accounting policies to exert a large effect on key decisions regarding
the estimates used in the consolidated financial statements.
Property, Plant and Equipment
Shiseido reviews fixed assets, primarily property, plant and equip-
ment, for impairment whenever circumstances indicate that their carrying
value may not be recoverable. Business-use assets are pooled by
business division to estimate future cash flow, and the net sales value of
idle assets is estimated for each separate asset. Based on these esti-
mates, assets are devalued from book value to recoverable value. We
consider the estimates of future cash flow and recoverable value to be
rational. However, unpredictable factors could cause changes in underly-
ing assumptions and estimates. This could change our estimates,
decrease future cash flow and recoverable value, and require us to
recognize impairment losses.
Goodwill, Trademarks and Other Intangible Assets
Shiseido reviews goodwill, trademarks and other intangible assets for
impairment periodically. Shiseido employs the opinions of external experts
in estimating fair value and examining impairment for goodwill,
trademarks and other intangible assets. The discounted cash flow method
primarily used to estimate fair value relies extensively on estimates and
assumptions regarding future cash flow and discount rate. These esti-
mates and assumptions may significantly affect measurement and the
amount of impairment recognized. We consider the estimates of fair value
used for measuring impairment to be rational. However, unforeseen chang-
es to underlying assumptions and estimates could reduce fair value and
require us to recognize impairment losses.
Securities
Shiseido recognizes loss on revaluation for securities reported as
available-for-sale securities for which fair value or market price has fallen
substantially below acquisition cost. Securities deemed recoverable are
excluded. Securities with a fair value that is more than 50 percent below
acquisition cost as of the balance sheet date are deemed
unrecoverable. The recoverability of securities with a fair value from 30 to
50 percent below acquisition cost is evaluated according to the perfor-
mance and financial condition of the issuing entity. Loss on revaluation is
recognized for securities for which fair value is not available if actual value
has fallen to more than 50 percent below the acquisition cost due to the
financial condition of the issuing entity. Securities deemed recoverable are
excluded. We consider the estimates of recoverability to be appropriate.
However, in the future the market price of securities deemed recoverable may
decrease and the performance and financial condition of the issuing entity
may deteriorate. This could require us to recognize loss on revaluation.
Deferred Tax Assets
Shiseido has established a valuation allowance for deferred tax
assets deemed unrecoverable using appropriate deferred tax asset
accounting. Historical data and future projections are used to
evaluate the recoverability of deferred tax assets to sufficiently deter-
mine taxable status. We consider these to be appropriate. However,
unpredictable factors could cause changes in underlying assumptions
that could reduce or eliminate deferred tax assets. This could require us
to provide additional allowances for deferred tax assets.
Retirement Benefits and Obligations
Shiseido’s domestic retirement benefit plans consist primarily of
corporate pension plans and termination allowance plans. Employee
benefits and obligations for defined benefits are calculated based
on assumptions including discount rate, employee turnover rate,
mortality rate and projected rate of return on pension plan assets.
These assumptions are revised annually. Discount rate and expect-
ed return on pension plan assets are critical assumptions in deter-
mining benefits and obligations. The discount rate is determined
based on the market rate as of the balance sheet date for long-term
fixed-rate bonds that carry little or no risk. Expected return on pen-
sion plan assets is determined based on an expected weighted-aver-
age return for the various types of assets held within the plan. We
consider these assumptions to be appropriate. However, actual
results may vary and changes in the underlying assumptions could
occur, which could affect retirement benefits and obligations.
CONSOLIDATED BALANCE SHEETS
Consolidated Financial Statements
Millions of yenThousands of
U.S. dollars (Note 1)
Note 2015/12 2016/12 2016/12
ASSETS
Current Assets:
Cash and time deposits 3, 4, 7 ¥ 116,771 ¥ 120,126 $ 1,030,859
Short-term investments in securities 3, 4, 5 7,685 7,905 67,836
Notes and accounts receivable: 4
Trade 127,201 136,768 1,173,672
Unconsolidated subsidiaries and affiliates 0 0 0
127,201 136,768 1,173,672
Less: allowance for doubtful accounts (1,765) (1,933) (16,588)
125,436 134,835 1,157,084
Inventories 6 105,928 115,672 992,637
Deferred tax assets 9 28,242 33,618 288,492
Other current assets 26,608 31,589 271,080
Total current assets 410,673 443,748 3,808,015
Property, Plant and Equipment, at Cost:
Buildings and structures 7 162,630 164,817 1,414,373
Machinery and equipment 7 164,851 167,218 1,434,978
Leased assets 7,373 7,414 63,623
334,855 339,450 2,912,983
Less: accumulated depreciation (236,406) (238,271) (2,044,718)
98,448 101,178 868,257
Land 29,989 36,604 314,116
Construction in progress 5,843 18,411 157,993
Total property, plant and equipment 19, 25 134,281 156,194 1,340,375
Intangible Assets:
Goodwill 25 59,430 59,795 513,129
Leased assets 513 401 3,441
Trademarks 60,087 146,209 1,254,689
Other intangible assets 41,372 39,927 342,632
Total intangible assets 19 161,403 246,333 2,113,901
Investments and Other Assets:
Investments in securities 4, 5, 7 24,631 22,532 193,357
Investments in unconsolidated subsidiaries and affiliates 4 2,803 2,367 20,312
Long-term prepaid expenses 12,692 13,377 114,794
Deferred tax assets 9 36,833 37,371 320,698
Other investments 7 25,226 24,081 206,650
Total investments and other assets 102,187 99,729 855,822
Total Assets ¥ 808,547 ¥ 946,007 $ 8,118,141
The accompanying notes are an integral part of the consolidated financial statements.
Shiseido Company, Limited and Subsidiaries
December 31, 2015 and 2016
82
Millions of yenThousands of
U.S. dollars (Note 1)
Note 2015/12 2016/12 2016/12
LIABILITIES AND NET ASSETS
Current Liabilities: Short-term debt 4, 7 ¥ 11,386 ¥ 11,583 $ 99,399 Current portion of long-term debt 4, 7 7,610 4,974 42,684 Notes and accounts payable: 4
Trade 32,162 50,149 430,352 Unconsolidated subsidiaries and affiliates 939 930 7,980
33,102 51,080 438,342
Electronically recorded obligations - operating 4 29,213 32,312 277,284 Other payables 4, 7 37,090 43,453 372,891 Accrued income taxes 4,661 5,561 47,721 Reserve for sales returns 14,799 12,948 111,113 Accrued bonuses for employees 18,480 22,110 189,736 Accrued bonuses for directors 55 99 849 Provision for liabilities and charges 1,192 2,024 17,368 Deferred tax liabilities 9 16 0 0 Other current liabilities 49,176 60,538 519,505 Total current liabilities 206,784 246,687 2,116,939 Long-Term Liabilities: Long-term debt 4, 7 67,617 104,022 892,662 Long-term payables 2, 4, 7 715 53,135 455,977 Liability for retirement benefits 8 83,656 94,489 810,855 Allowance for losses on guarantees 350 350 3,003 Allowance for environmental measures 377 376 3,226 Provision for structural reforms 990 — — Deferred tax liabilities 9 31,270 29,818 255,882 Other long-term liabilities 3,450 3,257 27,949 Total long-term liabilities 188,428 285,449 2,449,575 Total Liabilities 395,212 532,137 4,566,523
CONTINGENT LIABILITIES 10
NET ASSETS 11
Shareholders’ Equity: Common stock 64,506 64,506 553,557 Authorized: 1,200,000,000 shares as of December 31, 2015 and 2016 Issued: 400,000,000 shares as of December 31, 2015 and 2016
Capital surplus 70,258 70,846 607,963 Retained earnings 233,933 258,005 2,214,065 Less: treasury stock, at cost (1,700) (1,325) (11,370) Treasury stock: 899,741 shares as of December 31, 2015 and 700,745 shares as of December 31, 2016
Total shareholders’ equity 366,999 392,033 3,364,223 Accumulated Other Comprehensive Income: Unrealized gains (losses) on available-for-sale securities 5 8,144 7,389 63,408 Foreign currency translation adjustments 40,374 26,516 227,546 Accumulated adjustments for retirement benefits (23,854) (32,975) (282,974) Total accumulated other comprehensive income 24,664 930 7,980 Stock Acquisition Rights 12 863 818 7,019 Non-Controlling Interests in Consolidated Subsidiaries 20,806 20,087 172,376 Total Net Assets 413,334 413,870 3,551,617 Total Liabilities and Net Assets ¥808,547 ¥946,007 $8,118,141
83
CONSOLIDATED STATEMENTS OF INCOMEMillions of yen
Thousands ofU.S. dollars (Note 1)
Note 2015/12 2016/12 2016/12
Net Sales 25 ¥763,058 ¥850,306 $7,296,884
Cost of Sales 196,009 207,553 1,781,112
Gross profit 567,048 642,753 5,515,772
Selling, General and Administrative Expenses 13 529,388 605,972 5,200,137
Operating income 25 37,660 36,780 315,626
Other Income (Expenses): Interest and dividend income 1,731 1,293 11,095 Interest expense (809) (814) (6,985) Foreign exchange gain (loss) (1,790) (1,270) (10,898) Equity in earnings of affiliates 149 260 2,231 Gain on sales of investments in securities 5 2,426 402 3,449 Loss on revaluation of investments in securities (6) (21) (180) Gain (loss) on sales and disposal of property,
plant and equipment 18 (436) 8,122 69,698 Gain on transfer of business 17 5,772 8,952 76,821 Impairment loss 19 (153) (153) (1,312) Structural reform expenses 20 (1,485) (4,037) (34,643) Loss on liquidation of subsidiaries and affiliates 21 (812) — — Information security expenses 22 — (574) (4,925) Other, net 646 926 7,946
5,232 13,086 112,297
Income before income taxes 42,892 49,866 427,924
Income Taxes 9
Current 15,267 17,507 150,235 Deferred 2,024 (1,565) (13,430)
17,292 15,941 136,797
Net income 25,600 33,925 291,126
Net Income Attributable to Non-Controlling Interests (2,389) (1,823) (15,644)
Net Income Attributable to Owners of Parent ¥ 23,210 ¥ 32,101 $ 275,474
Yen U.S. dollars (Note 1)
Per Share 2
Net income attributable to owners of parent — basic ¥58.2 ¥80.4 $0.68 — diluted 58.1 80.3 0.68 Cash dividend 20.0 20.0 0.17 Weighted Average Number of Shares (thousands) 399,026 399,227
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Millions of yenThousands of
U.S. dollars (Note 1)
Note 2015/12 2016/12 2016/12
Net Income ¥ 25,600 ¥ 33,925 $ 291,126
Other Comprehensive Income Unrealized gains (losses) on available-for-sale securities 5 1,690 (813) (6,976) Foreign currency translation adjustments (9,173) (14,906) (127,915) Adjustments for retirement benefits (4,468) (9,136) (78,400) Share of other comprehensive income of
associates accounted for under the equity method (55) (90) (772) Total other comprehensive income (loss) 23 ¥(12,005) ¥(24,946) $(214,073)
Comprehensive Income ¥ 13,594 ¥ 8,978 $ 77,044 (Breakdown)
Comprehensive income attributable to owners of parent ¥ 12,323 ¥ 8,367 $ 71,801 Comprehensive income attributable to non-controlling interests 1,271 611 5,243
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME/CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEShiseido Company, Limited and Subsidiaries
For the fiscal period ended December 31, 2015 and the fiscal year ended December 31, 2016
Shiseido Company, Limited and Subsidiaries
For the fiscal period ended December 31, 2015 and the fiscal year ended December 31, 2016
84
Thousands Millions of yen
Numberof shares
of commonstock
Commonstock
Capitalsurplus
Retainedearnings
Treasury stock,at cost
Unrealizedgains (losses)
on available-for-sale securities
Foreign currency translation
adjustments
Accumulatedadjustmentsfor retirement
benefits
Stock acquisi-tion rights
Non-controllinginterests in
consolidatedsubsidiaries
Balance as of April 1, 2015 400,000 ¥64,506 ¥70,258 ¥218,757 ¥(2,214) ¥6,443 ¥ 48,544 ¥(19,435) ¥1,043 ¥21,465
Net income attributable to owners of parent — — — 23,210 — — — — — —
Cash dividend from retained earnings — — — (7,979) — — — — — —
Equity transactions with non-controlling interests and others — — — (55) — — — — — —
Acquisition of treasury stock — — — — (10) — — — — —Disposal of treasury stock — — 0 — 524 — — — — —Net changes of items other than shareholders’ equity — — — — — 1,701 (8,170) (4,418) (180) (658)
Balance as of December 31, 2015 400,000 64,506 70,258 233,933 (1,700) 8,144 40,374 (23,854) 863 20,806
Net income attributable to owners of parent — — — 32,101 — — — — — —Cash dividend from retained earnings — — — (7,983) — — — — — —Equity transactions with non-controlling interests and others — — 575 (46) — — — — — —
Acquisition of treasury stock — — — — (6) — — — — —Disposal of treasury stock — — 11 — 380 — — — — —Net changes of items other than shareholders’ equity — — — — — (755) (13,858) (9,120) (44) (718)
Balance as of December 31, 2016 400,000 ¥64,506 ¥70,846 ¥258,005 ¥(1,325) ¥7,389 ¥ 26,516 ¥(32,975) ¥ 818 ¥20,087
Thousands Thousands of U.S. dollars (Note 1)
Numberof shares
of commonstock
Commonstock
Capitalsurplus
Retainedearnings
Treasury stock,at cost
Unrealizedgains (losses)
on available-for-sale securities
Foreign currencytranslation
adjustments
Accumulatedadjustmentsfor retirement
benefit
Stock acquisi-tion rights
Non-controllinginterests in
consolidatedsubsidiaries
Balance as of January 1, 2016 400,000 $553,557 $602,917 $2,007,491 $(14,588) $69,887 $ 346,468 $(204,702) $7,405 $178,546
Net income attributable to owners of parent — — — 275,474 — — — — — —Cash dividend from retained earnings — — — (68,505) — — — — — —Equity transactions with non-controlling interests and others — — 4,934 (394) — — — — — —
Acquisition of treasury stock — — — — (51) — — — — —Disposal of treasury stock — — 94 — 3,260 — — — — —Net changes of items other than shareholders’ equity — — — — (6,479) (118,922) (78,263) (377) (6,161)
Balance as of December 31, 2016 400,000 $553,557 $607,963 $2,214,065 $(11,370) $63,408 $ 227,546 $(282,974) $7,019 $172,376
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN NET ASSETSShiseido Company, Limited, and Subsidiaries
For the fiscal period ended December 31, 2015 and the fiscal year ended December 31, 2016
Consolidated Financial Statements
85
Millions of yenThousands of
U.S. dollars (Note 1)
Note 2015/12 2016/12 2016/12
Cash Flows from Operating Activities: Income before income taxes ¥ 42,892 ¥ 49,866 $ 427,924 Depreciation 31,761 34,480 295,889 Amortization of goodwill 5,172 4,916 42,186 Impairment loss 153 153 1,312 (Gain) loss on sales and disposal of property, plant and equipment 436 (7,132) (61,203) (Gain) loss on sales of investments in securities (2,426) (402) (3,449) (Gain) loss on revaluation of investments in securities 6 21 180 Gain on transfer of business (5,772) (8,952) (76,821) Loss on liquidation of subsidiaries and affiliates 812 — — Increase (decrease) in allowance for doubtful accounts 620 233 1,999 Increase (decrease) in reserve for sales returns (396) (1,526) (13,095) Increase (decrease) in accrued bonuses for employees 1,845 3,917 33,613 Increase (decrease) in accrued bonuses for directors (127) 44 377 Increase (decrease) in provision for liabilities and charges 621 896 7,689 Increase (decrease) in provision for structural reforms (25) (990) (8,495) Increase (decrease) in liability for retirement benefits 1,562 (2,168) (18,604) Increase (decrease) in allowance for environmental measures (18) (1) (8) Interest and dividend income (1,731) (1,293) (11,095) Interest expense 809 814 6,985 Equity in earnings of affiliates (149) (260) (2,231) (Increase) decrease in notes and accounts receivable (1,745) (10,578) (90,774) (Increase) decrease in inventories (2,846) (9,500) (81,524) Increase (decrease) in notes and accounts payable 7,405 19,058 163,545 Other 5,721 3,235 27,761 Subtotal 84,579 74,831 642,160 Interest and dividends received 1,728 1,552 13,318 Interest paid (843) (838) (7,191) Income taxes paid (24,935) (16,415) (140,865) Net cash provided by operating activities 60,529 59,129 507,414
Cash Flows from Investing Activities: Transfers to time deposits (18,312) (14,207) (121,917) Proceeds from maturity of time deposits 17,915 17,641 151,385 Acquisition of short-term investments in securities (89) (4) (34) Proceeds from sales of short-term investments in securities 14 — — Acquisition of investments in securities (1,051) (430) (3,690) Proceeds from sales of investments in securities 6,762 650 5,577 Proceeds from transfer of business 4,233 10,938 93,864 Acquisition of property, plant and equipment (16,941) (31,366) (269,166) Proceeds from sales of property, plant and equipment 829 8,832 75,791 Acquisition of intangible assets (10,055) (32,340) (277,525) Payments of long-term prepaid expenses (5,373) (6,124) (52,552) Payments of long-term loans receivable (140) — — Acquisition of shares in subsidiaries resulting in change in scope of consolidation 3 (221) (24,426) (209,611) Sales of shares in subsidiaries resulting in change in scope of consolidation (141) — — Other (566) 197 1,690 Net cash used in investing activities (23,137) (70,640) (606,195)
Cash Flows from Financing Activities: Net increase (decrease) in short-term debt (15,600) 529 4,539 Proceeds from long-term debt 65,001 40,000 343,259 Repayment of long-term debt (68,599) (5,738) (49,240) Repayment of lease obligations (1,686) (2,187) (18,767) Acquisition of treasury stock (10) (6) (51) Disposal of treasury stock 525 392 3,363 Cash dividend paid (7,711) (8,214) (70,488) Cash dividend paid to non-controlling interests (2,071) (3,359) (28,825) Sales of shares in subsidiaries not resulting in change in scope of consolidation — 962 8,255 0ther — 0 0 Net cash provided by (used in) financing activities (30,151) 22,378 192,036 Effect of Exchange Rate Changes on Cash and Cash Equivalents (3,121) (2,672) (22,929)Net Change in Cash and Cash Equivalents 4,118 8,196 70,333 Cash and Cash Equivalents at Beginning of Year 3 100,807 104,926 900,420 Cash and Cash Equivalents at End of Year 3 ¥104,926 ¥113,122 $ 970,754
The accompanying notes are an integral part of the consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWSShiseido Company, Limited and Subsidiaries
For the fiscal period ended December 31, 2015 and the fiscal year ended December 31, 2016
Consolidated Financial Statements
86
1 BASIS OF PRESENTING CONSOLIDATED FINANCIAL STATEMENTS
Accounting Principles and Presentation The financial statements of Shiseido Company, Limited (the “Company”) and its consolidated subsidiaries have been prepared in accordance with the provisions set forth in the Financial Instruments and Exchange Law and Companies Act and in conformity with accounting principles generally accepted in Japan. Therefore, application and disclosure requirements are different from International Financial Reporting Standards in certain respects. Certain items presented in the consolidated financial statements filed with the Director of the Kanto Finance Bureau in Japan have been reclassified for the convenience of the reader. Amounts in U.S. dollars are included solely for the convenience of the reader. The rate of ¥116.53 = US$1 prevailing on December 31, 2016 has been used in translating the consolidated financial statements expressed in Japanese yen into U.S. dollars. Such translations should not be construed as representations that the Japanese yen amounts could be readily con-verted, realized or settled in U.S. dollars at this rate.
Change in Consolidated Fiscal Period-Ends Effective from the previous fiscal period, Shiseido and consolidated subsidiaries in Japan changed their balance sheet dates from March 31 to December 31. Following this change, the accounting period of the previous fiscal period was nine months, from April 1, 2015 to December 31, 2015.
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(1) Scope of Consolidation The Company has 92 subsidiaries (companies over which the Company exercises control over operations) as of December 31, 2016 (93 as of December 31, 2015). The accompanying consolidated financial statements as of December 31, 2016 include the accounts of the Company and its 90 (91 as of December 31, 2015) significant subsidiaries (the “Companies”). The Company has 3 affiliates (companies that are not subsidiaries but over which the Company exercises significant influence) as of December 31, 2016 (4 as of December 31, 2015). Investments in 3 affiliates are accounted for by the equity method as of December 31, 2016 (4 as of December 31, 2015). Gurwitch UK Ltd. has been included in the scope of consolidation effective from the fiscal year ended December 31, 2016 following the new acquisition of shares during the fiscal year ended December 31, 2016. Gurwitch Products, LLC. and GBP UK LLC. have been merged with Shiseido Americas Corporation by way of absorption in the fiscal year ended December 31, 2016 after the acquisition of new shares during the fiscal year ended December 31, 2016. Noms de Code S.A.S. was excluded from the scope of consolidation effective from the fiscal year ended December 31, 2016 following the transfer of shares held. Bare Escentuals Canada, Inc, was excluded from the scope of consolidation effective from the fiscal year ended December 31, 2016 following completion of an absorption-type merger with Shiseido (Canada) Inc. Salle de Fete was excluded as an affiliated company accounted for by the equity method effective from the fiscal year ended December 31, 2016 following the transfer of shares held. Investments in 2 unconsolidated subsidiaries are stated at cost as they are immaterial to the consolidated financial statements. The Company has adopted the “full fair value method” so that all of the assets and liabilities of the subsidiaries are marked to fair value as of the date of acquisition of control. All significant intercompany balances and transactions have been eliminated in consolidation. All material unrealized profits included in assets resulting from intercompany transactions are eliminated.
(2) Inventories Inventories are generally valued at cost, determined by the periodic average method. The carrying amount in the balance sheetis calculated with consideration of write-downs due to decreased profitability.
(3) Property, Plant and Equipment (Excluding Leased Assets) Tangible fixed assets are, in principle, depreciated using the straight-line method. The main estimated useful lives are as follows: Buildings and structures: 2-50 years Machinery, equipment and vehicles: 2-12 years Tools, furniture and fixtures: 2-15 years
(4) Intangible Assets (Excluding Leased Assets) Intangible assets are, in principle, amortized using the straight-line method. The main estimated useful lives are as follows: Software: 5 years Customer relationships: 10 years Trademarks: 10-15 years (except for those with indefinite useful lives)
(5) Leased Assets Finance leased assets that are not deemed to transfer ownership of the leased property to the lessee are depreciated usingthe straight-line method over the period of the lease, with zero residual value.
(6) Long-Term Prepaid Expenses Long-term prepaid expenses are primarily amortized using the straight-line method.
(7) Goodwill Amortization of goodwill is determined on a case by case basis and is generally amortized using the straight-line method overa period not exceeding 20 years.
(8) Securities The Company and its consolidated subsidiaries categorize their existing securities as available-for-sale securities. Those secu-rities with market prices are carried at fair value prevailing at the fiscal year end, with net unrealized gains and losses, net of taxes, reported separately in net assets. The cost of securities sold is mainly calculated using the moving-average method. If fair value is not available, securities are carried at cost, which is determined mainly by the moving-average method.
Shiseido Company, Limited and Subsidiaries
Notes to the Consolidated Financial Statements
87
Investments in limited partnerships are recorded as investments in securities at the amount of interest in such partnerships calculated based on ownership percentage. Investment gain or loss is included in net income or loss in proportion to the owner-ship interests in the net asset value of the partnership. Securities with remaining maturities of one year or less and securities that are recognized as cash equivalents are classified as short-term investments in securities. Those with maturities extending beyond one year are included in investments in securities as non-current assets.
(9) Net Income and Cash Dividend per Share Net income per share of common stock is based on the weighted average number of shares of common stock outstanding during each year. The computation of diluted net income per share of common stock reflects the maximum possible dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock. Cash dividend per share shown for each year in the consolidated statements of income represents the dividend declared as applicable to the respective year, rather than that paid in each year.
(10) Accounting for Consumption Tax In Japan, consumption tax is imposed at a flat rate on all domestic consumption of goods, assets and services (with certain exemptions). The consumption tax withheld upon sales is recorded as a liability. Consumption tax, which is paid by the Company and its domestic consolidated subsidiaries on purchases of goods, assets and services, is offset against the balance withheld, and the net amount is subsequently paid to the national government. Transactions subject to consumption taxes are recorded at amounts exclusive of consumption taxes.
(11) Allowance for Doubtful Accounts The Company and its domestic consolidated subsidiaries provide an allowance for doubtful accounts based on the historic percentage of actual bad debt losses against the balance of total receivables and the amount of uncollectible receivables estimated on an individual basis. Overseas consolidated subsidiaries record the allowance based primarily on the amount of uncollectible receivables estimated on an individual basis.
(12) Reserve for Sales Returns The Companies provide a reserve for sales returns for future losses considering the past return ratios and distributors’ stock.
(13) Accrued Bonuses for Employees The Companies provide accrued bonuses for employees based on the estimated amounts to be paid in respect of the fiscal year. This reserve includes bonuses for corporate officers who are non-Board members, for whom the calculations are the same as those described in Accrued Bonuses for Directors.
(14) Accrued Bonuses for Directors The Companies provide accrued bonuses for members of the Board of Directors who concurrently serve as corporate executive officers based on the estimated amounts to be paid in respect of the fiscal year.
(15) Provision for Liabilities and Charges To provide for losses due to legal risks, product guarantee risks, tax risks, and other factors, certain overseas consolidated subsidiaries record provisions, the amount of which is based on estimated losses to be incurred considering the likelihood of such losses in the future.
(16) Allowance for Losses on Guarantees The Company provides an allowance for estimated probable losses on guarantees based on the financial status of the parties for which guarantees have been provided.
(17) Allowance for Environmental Measures The Company and its domestic consolidated subsidiaries provide a reserve for the estimated cost to treat polychlorinated biphenyl (PCB) waste as required by the “Act on Special Measures Concerning Promotion of Proper Treatment of PCB Wastes” (Act No. 65 of 2001).
(18) Provision for Structural Reforms The Company provides a reserve for the estimated amount of expenses and the losses to be incurred in association with structural reforms.
(19) Liability for Retirement Benefits ① Periodic allocation method for the estimated retirement benefits The retirement benefit obligation is calculated by allocating the estimated retirement benefits until the end of the current fiscal year on a benefit formula basis. ② Amortization of past service cost and actuarial gains/losses Past service cost is primarily amortized on a straight-line basis over a 10-year period, which is shorter than the average remaining years of service of the eligible employees. Net actuarial gain or loss is primarily amortized from the following year on a straight-line basis over a 10-year period, which is shorter than the average remaining years of service of the eligible employees.
(20) Foreign Currency Translation Receivables and payables denominated in foreign currencies are translated into Japanese yen at the exchange rate prevailing on the respective balance sheet dates, and resulting exchange gains or losses are included in net income or loss for the fiscal year.
(21) Derivatives and Hedging Activities The Companies use derivatives such as foreign exchange forward contracts, foreign currency options, interest rate swap contracts, and interest rate and currency swap contracts to reduce market risks and maintain stable profits. The Companies limit their use of derivative transactions to the amounts of foreign currency denominated receivables and payables and actual requirements, and do not use derivatives for speculative trading. The Companies execute and manage derivatives within the limits of established internal rules and regulations, and reduce credit risk by limiting counterparties to highly creditworthy financial institutions. Derivatives are carried at fair value with gains or losses recognized in the consolidated statements of income. For derivatives used for hedging purposes, if derivatives meet the requirements for hedge accounting, gains or losses on derivatives are deferred until recognition of the hedged transactions. If foreign exchange forward contracts are used as a hedge and meet certain criteria, the exchange forward contracts are not stated at fair value, and instead the amount to be received under the exchange forward contracts is added to or deducted from the assets or liabilities for which the exchange forward contract was executed.
88
If interest rate swap contracts are used as a hedge and meet certain hedging criteria, the interest rate swaps are not stated at fair value, and instead the amount to be received under the interest rate swap contract is added to or deducted from the interest on the liabilities for which the swap contract was executed (special accounting). If interest rate and currency swap contracts are used as a hedge and meet certain hedging criteria, the interest rate and cur-rency swap contracts are not stated at fair value, and instead the amount to be received under the interest rate and currency swap contracts is added to or deducted from the interest on the liabilities for which the swap contracts were executed, and the liabilities denominated in foreign currencies, for which the interest rate and currency swap contracts were executed, are translated at the contracted rate (integral accounting). Measurement of hedge effectiveness is not considered necessary for interest rate swap contracts that meet the requirements for special accounting and interest rate and currency swap contracts that meet the requirements for integral accounting.
(22) Foreign Currency Denominated Financial Statements Financial statements of overseas consolidated subsidiaries and affiliates that are denominated in foreign currencies are translated into Japanese yen at the exchange rates prevailing at the respective balance sheet dates of those subsidiaries for assets and liabilities, and at the historical exchange rates for shareholders’ equity. All income and expense amounts are trans-late at the average rates of exchange during the fiscal year of those subsidiaries and affiliates. The resulting translation adjustments are included in net assets as foreign currency translation adjustments and non-controlling interests.
(23) Definition of “Cash and Cash Equivalents” in Consolidated Statements of Cash Flows Cash and cash equivalents as shown in the consolidated statements of cash flows are composed of cash in hand, readily available time deposits, and short-term investments with maturities of 3 months or less at the time of purchase that are exposed to insignificant risk of change in value.
(24) Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements
The Company has applied “Practical Solution on Unification of Accounting Policies Applied to Foreign Subsidiaries for Consolidated Financial Statements” (ASBJ Practical Issues Task Force No. 18, March 26, 2015 amendment), and necessary modifications have been made for consolidation.
(25) Application of Consolidated Taxation System The Company and certain domestic consolidated subsidiaries applied a consolidated taxation system.
(26) Changes in Presentation Due to the increase in quantitative significance of “Long-term payables” which was included in “Other long-term liabilities” in the previous fiscal period, the Company has changed to record it separately for this fiscal year. The consolidated financial statements for the fiscal period ended December 31, 2015 has been rearranged in order to reflect this alteration. As a result, ¥4,165 million recorded as “Other long-term liabilities” on the balance sheets for the previous fiscal period has been classified into ¥715 million of “Long-term payables” and ¥3,450 million of “Other long-term liabilities” respectively.
(27) Accounting Standard Issued but Not Yet Adopted1. The Company and domestic affiliates Implementation Guidance on Recoverability of Deferred Tax Assets Accounting Standards Boards of Japan (ASBJ Guidance No. 26, March 28, 2016)(1) Overview Following the framework in Auditing Committee Report No. 66 “Audit Treatment regarding the Judgment of Recoverability of Deferred Tax Assets,” which prescribes estimation of deferred tax assets according to the classification of the entity by one of five types, the following treatments were changed as necessary: 1. Treatment for an entity that does not meet any of the criteria types 1 to 5; 2. Criteria for types 2 and 3; 3. Treatment for deductible temporary differences that an entity classified as type 2 is unable to schedule; 4. Treatment for the period which an entity classified as type 3 is able to reasonably estimate with respect to future taxable
income before consideration of taxable or deductible temporary differences that exist at the end of current annual period; and
5. Treatment for meet as criteria 2 or 3 for an entity classified as type 4.(2) Effective date The guidance is effective from the beginning of the year ending December 31, 2017.(3) Effects of application of the guidance The impact of Company’s consolidated financial statements from the adoption of implementation guidance on recoverability of deferred tax assets is under evaluation at the time of the preparation of consolidated financial statements.
2. Foreign Affiliates
Standard/interpretation Outline of the new/revised standards To be adopted by the Group
IFRS 16 Lease Revision to accounting treatment for leaseFrom the beginning of the year ending December 31, 2019
ASU 2016-12 Lease Revision to accounting treatment for leaseFrom the beginning of the year ending December 31, 2019
The impact of Company’s consolidated financial statements from the adoption of standards lease is under evaluation at the time of the preparation of consolidated financial statements.
Notes to the Consolidated Financial Statements
89
3 CASH FLOW INFORMATION
(1) The reconciliation of cash and time deposits shown in the consolidated balance sheets and cash and cash equivalents shown in the consolidated statements of cash flows as of December 31, 2015 and 2016 is as follows:
Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
Cash and time deposits ¥116,771 ¥120,126 $1,030,859
Short-term investments in securities 7,685 7,905 67,836
Total ¥124,457 ¥128,032 $1,098,704
Time deposits with maturities exceeding 3 months (17,463) (13,004) (111,593)
Debt securities with maturities exceeding 3 months (2,067) (1,905) (16,347)
Cash and cash equivalents ¥104,926 ¥113,122 $ 970,754
(2) For the main breakdown of assets, liabilities and the acquisition cost of Gurwitch Products, LLC. which was newly consoli-dated as a result of the acquisition of shares is as follows:
For the fiscal year ended December 31, 2016
Millions of yenThousands of
U.S. dollars (Note 1)
Current assets ¥ 8,658 $ 74,298
Non-current assets ¥19,024 $163,254
Current liabilities ¥ (1,965) $ (16,862)
Acquisition cost of newly consolidated subsidiaries ¥25,717 $220,689
Cash and cash equivalents of newly consolidated subsidiaries ¥ (1,291) $ (11,078)
Acquisition of shares in subsidiaries resulting in change in scope of consolidation ¥24,426 $209,611
(3) Significant non-cash transactions are as follows: Newly recorded assets and liabilities related to finance lease transactions are as follows: For the fiscal period ended December 31, 2015
Lease assets ¥1,417 million
Lease obligations 1,417 million
For the fiscal year ended December 31, 2016
Lease assets ¥1,700 million ($14,588 thousand)
Lease obligations 1,700 million (14,588 thousand)
Newly recorded assets and liabilities related to intangible assets are as follows: For the fiscal year ended December 31, 2016
Intangible assets ¥61,608 million ($528,687 thousand)
Long-term payables (including other payables) 61,608 million (528,687 thousand)
4 FINANCIAL INSTRUMENTS
(1) Financial Instruments① Policy for financial instruments
The Companies limit fund management to short-term deposits, investments in securities and other methods. As a matter of policy, the Companies procure funds using bank loans, commercial paper, bonds and other methods. The Companies use derivatives to avoid the risk of foreign exchange rate fluctuations associated with receivables and payables denominated in foreign currencies and the risk of interest rate fluctuations associated with loans. The Companies limit the use of derivatives to the volume of receivables and payables and actual requirements, and do not engage in specu-lative transactions.
② Types of financial instruments, risks and risk management system Notes and accounts receivable are exposed to customer credit risk. The Companies mitigate this risk by managing settle-ment date and amount due for each counterparty. Investments in securities, primarily the equity securities of corporations with which the Companies do business, are exposed to the risk of fluctuations in market price. The Companies manage this risk by periodically examining market prices and the financial condition of the issuing entities. Notes, electronically recorded obligations and accounts payable are due within one year. Interest-bearing debt includes short-term borrowings and commercial paper, which the Companies use to procure funds for
90
Notes to the Consolidated Financial Statements
operating transactions, as well as long-term borrowings, bonds and lease obligations, which the Companies use to fund investments and loans, capital expenditures and operating transactions. Long-term payables, which are mostly liabilities incurred in connection with the execution of a license agreement, are not exposed to foreign exchange risk and interest rate risk. Floating-rate debt is exposed to the risk of interest rate fluctuations. The Companies hedge this risk for specific long-term borrowings by using derivatives (interest rate swap contracts and interest rate and currency swap contracts) to avoid the risk of interest rate fluctuations and fix interest payments. The Companies use foreign exchange forward contracts and foreign currency options to hedge the risk of foreign exchange fluctuations associated with receivables and payables denominated in foreign currencies and interest rate swap contracts to hedge the risk of interest rate fluctuations associated with floating-rate debt, and interest rate and currency swap contracts to hedge the risk of foreign exchange fluctuations and fluctuations in interest rates associated with debt in foreign currencies. (21) Derivatives and Hedging Activities in Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES explains hedge account-ing, hedging instruments and methods, hedging policy, hedged items, and assessment of hedging effectiveness. The Companies execute and manage derivatives within the limits of established internal rules and regulations, and reduce credit risk by limiting counterparties to highly creditworthy financial institutions. Payables and interest-bearing debt are exposed to liquidity risk that the Companies manage in ways such as preparing monthly capital deployment reports.
③ Supplemental information on the fair value of financial instruments The Companies calculate the fair value of financial instruments based on market prices, or by using reasonable estimates when market prices are not available. These estimates include variable factors, and are subject to fluctuation due to changes in the underlying assumptions. The contract amounts of the derivatives discussed in Note 16. DERIVATIVE FINANCIAL INSTRUMENTS are not an indicator of the market risk associated with derivative transactions.
(2) Fair Value of Financial InstrumentsFair value and variance with carrying value presented on the consolidated balance sheets are as follows. Fair values that are not readily determinable are not included in the following table (See *2 for additional information).
Millions of yen
2015/12
Carrying value (*) Fair value (*) Variance
① Cash and time deposits ¥116,771 ¥116,771 —
② Notes and accounts receivable (less allowance for doubtful accounts) 125,436 125,436 —
③ Short-term investments in securities and investments in securities Available-for-sale securities 30,854 30,854 —
④ Notes and accounts payable, Electronically recorded obligations and other payables (99,406) (99,406) —
⑤ Short-term borrowings from banks and other financial institutions (7,167) (7,167) —
⑥ Commercial papers (4,218) (4,218) —
⑦ Bonds (30,000) (30,180) ¥ (180)
⑧ Long-term borrowings from banks and other financial institutions (41,172) (43,708) (2,536)
⑨ Lease obligations (4,054) (4,071) (16)
⑩ Derivative instruments i. Hedge accounting not applied (16) (16) — ii. Hedge accounting applied — 1,859 1,859
Millions of yen
2016/12
Carrying value (*) Fair value (*) Variance
① Cash and time deposits ¥ 120,126 ¥ 120,126 — ② Notes and accounts receivable (less allowance for doubtful accounts) 134,835 134,835 — ③ Short-term investments in securities and investments in securities Available-for-sale securities 28,961 28,961 — ④ Notes and accounts payable, Electronically recorded obligations and other payables (126,845) (126,845) —⑤ Short-term borrowings from banks and other financial institutions (6,339) (6,339) — ⑥ Commercial papers (5,243) (5,243) — ⑦ Bonds (40,000) (40,165) ¥(165)⑧ Long-term borrowings from banks and other financial institutions (65,426) (66,160) (734)⑨ Lease obligations (3,570) (3,605) (35)⑩ Derivative instruments
i. Hedge accounting not applied (601) (601) — ii. Hedge accounting applied — (22) (22)⑪ Long-term payables (53,135) (53,135) —
91
Thousands of U.S. dollars (Note 1)
2016/12
Carrying value (*) Fair value (*) Variance
① Cash and time deposits $1,030,859 $1,030,859 — ② Notes and accounts receivable (less allowance for doubtful accounts) 1,157,084 1,157,084 — ③ Short-term investments in securities and investments in securities Available-for-sale securities 248,528 248,528 — ④ Notes and accounts payable, Electronically recorded obligations and other payables (1,088,517) (1,088,517) — ⑤ Short-term borrowings from banks and other financial institutions (54,398) (54,398) — ⑥ Commercial papers (44,992) (44,992) — ⑦ Bonds (343,259) (344,675) (1,415)⑧ Long-term borrowings from banks and other financial institutions (561,451) (567,750) (6,298)⑨ Lease obligations (30,635) (30,936) (300)⑩ Derivative instruments
i. Hedge accounting not applied (5,157) (5,157) — ii. Hedge accounting applied — (188) (188)⑪ Long-term payables (455,977) (455,977) —
* Liabilities are in parentheses. Derivative instruments are presented as net amounts receivable or payable, with net amounts payable
in parentheses.
*1 Method for calculating the fair value of financial instruments, derivative instruments and securities
① Cash and time deposits; ② Notes and accounts receivable
Carrying value is used for fair value for these short-term items because these amounts are approximately the same.
③ Short-term investments in securities and investments in securities
Short-term investments in securities are held as available-for-sale securities. Market prices on exchanges are used to determine the fair
value of equity securities. Prices quoted by financial institutions are used to determine the fair value of bonds. Carrying value is used for
fair value for instruments with short-term maturities included in available-for-sale securities because these amounts are approximately
the same.
④ Notes and accounts payable, Electronically recorded obligations and other payables; ⑤ Short-term borrowings from banks and other
financial institutions; ⑥ Commercial papers
Carrying value approximates fair value for these short-term items.
⑦ Bonds
Fair value of bonds issued by the Company is calculated based on market prices.
⑧ Long-term borrowings from banks and other financial institutions
Floating-rate long-term borrowing reflects market interest rates. In addition, fair value approximates carrying value because the Company’s
creditworthiness does not vary significantly after assuming long-term borrowings. Therefore, carrying value is used for fair value of
floating-rate long-term borrowing. Fair value of fixed-rate long-term borrowing is the discounted value of total principal and interest using
an assumed interest rate on equivalent new borrowings.
⑨ Lease obligations
The fair value of lease obligations is the discounted present value of total principal and interest using an assumed interest rate on
equivalent new lease transactions.
⑩ Derivative instruments
Please refer to Note 16. DERIVATIVE FINANCIAL INSTRUMENTS.
⑪ Long-term payables
Carrying value and fair value of long-term payables are measured and calculated as the present value discounted using the interest rate
that is assumed to be applied when an additional loan is taken out from banks, etc. for future cash flows.
*2 Fair values that are difficult to determine as of December 31, 2015 and 2016
Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
Carrying value Carrying value Carrying value
Shares of subsidiaries and affiliates ¥2,803 ¥2,367 $20,312Unlisted equity securities 544 552 4,736 Investment in limited partnership and others 918 924 7,929
Market prices do not exist for these items, or the cost of estimating future cash flows is considered prohibitive. These items are not
included in ③ Short-term investments in securities and investments in securities, because their fair values are not readily determinable.
Loss on revaluation for securities stated at cost was recognized in the amounts of ¥6 million and ¥21 million ($180 thousand) for the
fiscal period ended December 31, 2015 and the fiscal year ended December 31, 2016, respectively.
92
Notes to the Consolidated Financial Statements
*3 Maturity dates of financial assets are as follows:
Millions of yen
2015/12
Due in 1 year or lessDue after 1 yearthrough 5 years
Due after 5 yearsthrough 10 years
Due after 10 years
Cash and time deposits ¥116,771 — — —
Notes and accounts receivable 125,436 — — — Short-term investments in securities and investments in securities
Available-for-sale securities with maturity (Negotiable certificate of deposit) — — — —
Available-for-sale securities with maturity (Corporate bonds) — — — —
Available-for-sale securities with maturity (Investment trusts) 2,618 — — —
Available-for-sale securities with maturity (Investment in limited partnerships and others) 141 ¥776 — —
Other — — — — ¥244,967 ¥776 — —
Millions of yen
2016/12
Due in 1 year or lessDue after 1 yearthrough 5 years
Due after 5 yearsthrough 10 years
Due after 10 years
Cash and time deposits ¥120,126 — — — Notes and accounts receivable 134,835 — — — Short-term investments in securities and investments in securities
Available-for-sale securities with maturity (Negotiable certificate of deposit) 6,000 — — — Available-for-sale securities with maturity (Corporate bonds) — — — —
Available-for-sale securities with maturity (Investment trusts) 1,905 — — — Available-for-sale securities with maturity (Investment in limited partnerships and others) 77 ¥846 — — Other — — — —
¥262,945 ¥846 — —
Thousands of U.S. dollars (Note 1)
2016/12
Due in 1 year or lessDue after 1 yearthrough 5 years
Due after 5 yearsthrough 10 years
Due after 10 years
Cash and time deposits $1,030,859 — — — Notes and accounts receivable 1,157,084 — — — Short-term investments in securities and investments in securities
Available-for-sale securities with maturity (Negotiable certificate of deposit)
51,488 — — —
Available-for-sale securities with maturity (Corporate bonds)
— — — —
Available-for-sale securities with maturity (Investment trusts)
16,347 — — —
Available-for-sale securities with maturity (Investment in limited partnerships and others)
660 $7,259 — —
Other — — — — $2,256,457 $7,259 — —
5 SECURITIES
The acquisition cost, carrying amount, and gross unrealized gains and losses for securities stated at fair value by security typeat December 31, 2015 and 2016 are as follows:
Available-for-sale securities:Millions of yen
2015/12
Acquisition cost Carrying amount Gross unrealized gains Gross unrealized losses
Equity securities ¥10,299 ¥22,013 ¥11,763 ¥(50)
Other 8,430 8,841 410 —
¥18,730 ¥30,854 ¥12,174 ¥(50)
93
Millions of yen
2016/12
Acquisition cost Carrying amount Gross unrealized gains Gross unrealized losses
Equity securities ¥10,123 ¥19,899 ¥ 9,899 ¥(123)Other 8,785 9,061 275 —
¥18,909 ¥28,961 ¥10,175 ¥(123)
Thousands of U.S. dollars (Note 1)
2016/12
Acquisition cost Carrying amount Gross unrealized gains Gross unrealized losses
Equity securities $ 86,870 $170,762 $84,948 $(1,055)Other 75,388 77,756 2,359 —
$162,267 $248,528 $87,316 $(1,055)
* There is no loss on revaluation of investments in securities stated at fair value for the fiscal period ended December 31, 2015 and the fiscal year
ended December 31, 2016, respectively.
Proceeds from sales, and gross realized gains and losses from sales of available-for-sale securities in the fiscal period ended December 31, 2015 and the fiscal year ended December 31, 2016 are as follows:
Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
Proceeds from sales ¥6,777 ¥650 $5,577 Gross realized gains 2,428 403 3,458Gross realized losses 0 0 0
6 INVENTORIES
Inventories held by the Companies as of December 31, 2015 and 2016 are as follows:
Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
Merchandise and finished products ¥ 74,629 ¥ 81,432 $698,807 Work in process 5,726 5,657 48,545 Raw materials and supplies 25,572 28,583 245,284
¥105,928 ¥115,672 $992,637
7 SHORT-TERM AND LONG-TERM DEBT
Short-term and long-term debt as of December 31, 2015 and 2016 are as follows:
Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
Short-term borrowings from banks and other financial institutions
(weighted average interest rate 5.51%)
Commercial papers (weighted average interest rate 1.10%)
¥ 7,167
4,218
¥ 6,339 5,243
$ 54,398 44,992
Short-term debt ¥11,386 ¥ 11,583 $ 99,399
Long-term borrowings from banks and other financial institutions
(Borrowings due within one year, weighted average interest rate 0.70%) 5,739 3,230 27,718
(Borrowings due after one year, weighted average interest rate 0.23%) 35,432 62,196 533,733
0.237% unsecured yen bonds due in June 2020 15,000 15,000 128,722
0.374% unsecured yen bonds due in June 2022 15,000 15,000 128,722
0.001% unsecured yen bonds due in December 2019 — 10,000 85,814
Lease obligations
(Borrowings due within one year, weighted average interest rate 1.92%) 1,870 1,744 14,966
(Borrowings due after one year, weighted average interest rate 2.23%) 2,184 1,826 15,669
Long-term payables (including other payables)
(weighted average interest rate 2.50%) — 55,251 474,135 ¥75,227 ¥164,248 $1,409,491
Less: portion due within one year (7,610) (7,819) (67,098)
Long-term debt ¥67,617 ¥156,428 $1,342,383
94
Notes to the Consolidated Financial Statements
The aggregate annual maturities of long-term debt as of December 31, 2016 are as follows:
For the years ending December 31 Millions of yenThousands of
U.S. dollars (Note 1)
2017 ¥ 7,819 $ 67,098
2018 4,248 36,454
2019 14,024 120,346
2020 18,919 162,353
2021 26,476 227,203
2022 and thereafter 92,759 796,009
¥164,248 $1,409,491
Assets pledged as collateral as of December 31, 2015 and 2016 are as follows:
Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
Buildings and structures ¥13,681 ¥13,161 $112,940
Other investments 15,200 15,200 130,438
Investments in securities 1,155 1,155 9,911
Cash and time deposits 1,797 1,808 15,515
Machinery and equipment 1 0 0 ¥31,835 ¥31,327 $268,832
The above assets are pledged as collateral for derivative transactions (interest rate swaps) and the following collateralized liabilities as of December 31, 2015 and 2016:
Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
Current portion of long-term debt ¥ 730 ¥ 730 $ 6,264
Long-term debt 20,295 19,565 167,896 ¥21,025 ¥20,295 $174,161
8 RETIREMENT BENEFITS
(1) The Company and its domestic consolidated subsidiaries have contributory funded pension plans, unfunded termination allow-ance plans, defined contribution plans and a retirement benefit prepayment plan. In some cases, additional voluntary retirement benefits were paid when an employee retired, which were accounted for as retirement benefit expenses when incurred. In addition, certain overseas subsidiaries have defined benefit plans, retirement allowance plans and defined contribution plans. The Company and certain consolidated subsidiaries use a simplified method for calculating retirement benefits.
(2) Details of defined benefit plans, including plans applying a simplified method for calculating retirement benefits as of December 31, 2015 and December 31, 2016 are as follows:
① Movement in retirement benefit obligations Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
Balance at the beginning of the year ¥265,149 ¥265,825 $2,281,172 Service cost 5,459 6,996 60,036 Interest cost 2,422 3,015 25,873 Actuarial loss (gain) 2,398 17,571 150,785 Benefits paid (8,356) (10,706) (91,873)Other (1,248) (353) (3,029)Balance at the end of the year ¥265,825 ¥282,348 $2,422,964
95
② Movement in plan assets Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
Balance at the beginning of the year ¥187,445 ¥182,168 $1,563,271 Expected return on plan assets 5,599 7,260 62,301 Actuarial loss (gain) (6,185) (3,168) (27,186)Contributions paid by the employer 2,536 9,567 82,099 Benefits paid (6,687) (7,879) (67,613)Other (538) (89) (763)Balance at the end of the year ¥182,168 ¥187,859 $1,612,108
③ Reconciliation of retirement benefit obligations and plan assets to liability for retirement benefits Millions of yen
Thousands ofU.S. dollars (Note 1)
2015/12 2016/12 2016/12
Funded retirement benefit obligations ¥ 206,002 ¥ 220,405 $1,891,401 Plan assets (182,168) (187,859) (1,612,108)
23,833 32,546 279,292 Unfunded retirement benefit obligations 59,823 61,943 531,562 Total net liability for retirement benefits ¥ 83,656 ¥ 94,489 $ 810,855
Liability for retirement benefits ¥ 83,656 ¥ 94,489 $ 810,855 Total net liability for retirement benefits ¥ 83,656 ¥ 94,489 $ 810,855
④ Retirement benefit costs Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
Service cost ¥ 5,459 ¥ 6,996 $ 60,036 Interest cost 2,422 3,015 25,873 Expected return on plan assets (5,599) (7,260) (62,301)Net actuarial gain and loss amortization 3,478 7,190 61,700 Past service costs amortization 77 103 883 Other 846 2,200 18,879 Total retirement benefit costs ¥ 6,685 ¥12,246 $105,088
⑤ Adjustments for retirement benefits before tax Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
Net actuarial gain and loss amortization ¥4,992 ¥13,445 $115,378
⑥ Accumulated adjustments for retirement benefits before tax Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
Past service costs that are yet to be recognized ¥ 129 ¥ 25 $ 214
Actuarial gain and loss that are yet to be recognized 35,649 49,052 420,938
Total balance at the end of the year ¥35,779 ¥49,078 $421,161
⑦ Plan assets Ⅰ Plan assets comprise:
2015/12 2016/12
Bonds 59.1% 57.5%
Equity securities 21.2% 20.4%
Other 19.7% 22.1%
Total 100.0% 100.0%
Ⅱ Long-term expected rate of return on plan assets Terms of payment, portfolio of plan assets, historical returns, operating policy, market trends and other factors have been
considered in determining the long-term expected rate of return on plan assets.
⑧ Actuarial assumptionsThe principal actuarial assumptions (expressed as weighted averages) are as follows:
2015/12 2016/12
Discount rate 0.9%~1.2% 0.6%~0.8%
Long-term expected rate of return on plan assets 4.0% 4.0%
96
Notes to the Consolidated Financial Statements
(3) Defined contribution plans Contributions to defined contribution plans and retirement benefit prepayment plans are ¥1,572 million and ¥305 million, respectively, for the period ended December 31, 2015. Contributions to defined contribution plans and retirement benefit prepayment plans are ¥1,438 million ($12,340 thousand) and ¥428 million ($3,672 thousand), respectively, for the year ended December 31, 2016.
9 INCOME TAXES
Income taxes applicable to the Company and its domestic consolidated subsidiaries consist of corporation, inhabitants and enterprise taxes. The statutory income tax rate was 33% for the fiscal year ended December 31, 2016. Reconciliation of the statutory tax rate and the effective tax rate for the fiscal period ended December 31, 2015 and the fiscal year ended December 31, 2016 is as follows:
2015/12 2016/12 2014
Statutory tax rate 33.0% 33.0%
Increase (decrease) due to:
Permanently non-deductible expenses 0.7 0.8
Dividend income not taxable 2.5 0.9
Unrealized intercompany profit 4.4 (4.2)
Adjustment of deferred tax assets for enacted changes in tax rates — 0.6
Tax credits (2.3) (2.9)
Differences of statutory tax rates for overseas consolidated subsidiaries 2.0 1.4
Change in valuation allowance (0.5) 1.0
Others 0.5 1.4
Effective tax rate 40.3% 32.0%
The “Act for Partial Amendment of the Income Tax, etc.” (Act No. 15 of 2016) and the “Act for Partial Amendment of the Local Tax Act, etc.” (Act No. 13 of 2016) were enacted on March 29, 2016. In addition, the “Act for Partial Amendment of the Consumption Tax, etc. for the radical improvement of the tax system ensuring financial resources for the social securities” and the “Act for Partial Amendment of the Local Tax and the Local Distribution Tax, etc. for the radical improvement of the tax system ensuring financial resources for the social securities” were established on November 18, 2016. Due to the above legislation, the statutory effective tax rate used for the calculation of deferred tax assets and liabilities in the fiscal year as of December 31, 2016 was changed to 31% from 32% in the previous fiscal period. The impact of this change on the consolidated financial statements in the fiscal year ended December 31, 2016 is immaterial.
Deferred tax assets and liabilities (both current and non-current) as of December 31, 2015 and 2016 are as follows:
Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
Deferred tax assets:
Liability for retirement benefits ¥27,267 ¥30,854 $264,773 Inventories 10,773 12,845 110,229 Depreciation 1,966 1,602 13,747 Unrealized intercompany profit in inventory and property, plant and equipment 5,720 6,768 58,079 Accrued expenses 6,685 8,191 70,290 Accrued bonuses for employees 4,351 5,207 44,683 Loss on revaluation of financial instruments 3,632 1,025 8,796 Tax losses carried forward 4,271 4,118 35,338 Reserve for sales returns 1,751 958 8,221 Accrued enterprise tax 225 781 6,702 Other 9,902 12,955 111,173 Total gross deferred tax assets 76,548 85,309 732,077 Less: valuation allowance (4,762) (6,474) (55,556) Total deferred tax assets ¥71,785 ¥78,835 $676,521
Deferred tax liabilities:
Goodwill and other intangible assets ¥29,883 ¥26,545 $227,795 Special tax-purpose reserve 710 2,544 21,831 Unrealized gains (losses) on available-for-sale securities 4,072 2,812 24,131 Undistributed earnings of overseas consolidated subsidiaries 1,347 1,918 16,459 Other 1,982 3,843 32,978 Total deferred tax liabilities ¥37,996 ¥37,664 $323,212 Net deferred tax assets ¥33,788 ¥41,170 $353,299
97
Net deferred tax assets are included in the consolidated balance sheets as follows:
Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
Current assets–deferred tax assets ¥ 28,242 ¥ 33,618 $ 288,492
Investments and other assets–deferred tax assets 36,833 37,371 320,698
Current liabilities–deferred tax liabilities (16) 0 (0)
Long-term liabilities–deferred tax liabilities (31,270) (29,818) (255,882)
Net deferred tax assets ¥ 33,788 ¥ 41,170 $ 353,299
10 CONTINGENT LIABILITIES
There are no significant contingent liabilities to be disclosed.
11 NET ASSETS
Under Japanese laws and regulations, the entire amount paid for new shares must be designated as common stock. However,a company may, by a resolution of the Board of Directors, designate an amount not exceeding one half of the price of the new shares as additional paid-in capital, which is included in capital surplus. Under the Japanese Companies Act (“the Act”), in cases where dividend distribution of surplus is made, the lesser of an amount equal to 10% of the dividend or the excess, if any, of 25% of common stock over the total of additional paid-in capital and legal earnings reserve, must be set aside as additional paid-in capital or legal earnings reserve. Legal earnings reserve is included in retained earnings in the accompanying consolidated balance sheets. Under the Act, both legal earnings reserve and additional paid-in capital used to eliminate or reduce a deficit generally require a resolution of the shareholders’ meeting. Additional paid-in capital and legal earnings reserve may not be distributed as dividends. Under the Act, all additional paid-in capital and legal earnings reserve may be transferred to other capital surplus and retained earnings under certain conditions. The maximum amount that the Company can distribute as dividends is calculated based on the non-consolidated financial statements of the Company in accordance with the Act. Under the Act, companies can pay a dividend at any time during the fiscal year in addition to the year-end dividend upon resolution at the shareholders’ meeting. For the company that meets certain criteria such as: (1) having a Board of Directors, (2) having accounting auditors, (3) having a Board of Corporate Auditors, and (4) the term of service of the directors is prescribed as one year rather than two years as the normal term by its articles of incorporation, the Board of Directors may declare a dividend if the company has prescribed so in its articles of incorporation. A semi-annual interim dividend may also be paid once a year upon resolution by the Board of Directors if the articles of incor-poration of the company so stipulate. Cash dividends charged to retained earnings during the fiscal year were the year-end cash dividend for the preceding fiscal year and the interim cash dividend for the current fiscal year. Appropriations are not accrued in the consolidated financial statements for the corresponding period, but are recorded in the subsequent accounting period after shareholders’ meeting approval has been obtained. Retained earnings at December 31, 2016 include amounts representing year-end cash dividend of ¥3,992 million ($34,257 thousand), ¥10.0 ($0.08) per share, which was approved at the shareholders’ meeting held on March 28, 2017.
12 STOCK OPTION PLAN
Summarized information on the stock options granted as of December 31, 2016 is as follows:
① Stock option plan approved by the shareholders on June 26, 2007 and resolved by the Board of Directors on July 31, 2007Stock options granted on
August 23, 2007Stock options granted on
August 23, 2007 Total
Number of shares for options granted 81,000 shares 78,000 shares 159,000 shares
Number of shares for options outstanding 74,000 shares 45,000 shares 119,000 shares
Exercise price ¥2,615 ¥2,615
Exercisable period August 1, 2009 - July 30, 2017 August 1, 2009 - July 30, 2017
② Stock option plan resolved by the Board of Directors on July 31, 2008Stock options granted on
August 21, 2008 Total
Number of shares for options granted 40,000 shares 40,000 shares
Number of shares for options outstanding 9,000 shares 9,000 shares
Exercise price ¥1
Exercisable period August 1, 2011 - July 30, 2018
98
Notes to the Consolidated Financial Statements
③ Stock option plan approved by the shareholders on June 24, 2009 and resolved by the Board of Directors on July 31, 2009Stock options granted on
August 28, 2009Stock options granted on
August 30, 2009 Total
Number of shares for options granted 81,400 shares 53,500 shares 134,900 shares
Number of shares for options outstanding 7,400 shares 20,600 shares 28,000 shares
Exercise price ¥1 ¥1
Exercisable period August 1, 2012 - July 31, 2019 August 1, 2012 - July 31, 2019
④ Stock option plan approved by the shareholders on June 25, 2010 and resolved by the Board of Directors on July 29, 2010Stock options granted on
August 30, 2010Stock options granted on
August 30, 2010 Total
Number of shares for options granted 59,100 shares 46,800 shares 105,900 shares
Number of shares for options outstanding 5,400 shares 23,400 shares 28,800 shares
Exercise price ¥1 ¥1
Exercisable period August 1, 2013 - July 31, 2020 August 1, 2013 - July 31, 2020
⑤ Stock option plan approved by the shareholders on June 24, 2011 and resolved by the Board of Directors on July 29, 2011Stock options granted on
August 30, 2011Stock options granted on
August 30, 2011 Total
Number of shares for options granted 90,800 shares 63,600 shares 154,400 shares
Number of shares for options outstanding 7,300 shares 42,400 shares 49,700 shares
Exercise price ¥1 ¥1
Exercisable period August 1, 2014 - July 31, 2026 August 1, 2014 - July 31, 2026
⑥ Stock option plan approved by the shareholders on June 26, 2012 and resolved by the Board of Directors on July 31, 2012Stock options granted on
August 30, 2012Stock options granted on
August 30, 2012 Total
Number of shares for options granted 108,600 shares 100,400 shares 209,000 shares
Number of shares for options outstanding 67,000 shares 57,100 shares 124,100 shares
Exercise price ¥1 ¥1
Exercisable period August 1, 2015 - July 31, 2027 August 1, 2015 - July 31, 2027
⑦ Stock option plan approved by the shareholders on June 25, 2013 and resolved by the Board of Directors on July 31, 2013Stock options granted on
August 29, 2013Stock options granted on
August 29, 2013 Total
Number of shares for options granted 44,100 shares 39,500 shares 83,600 shares
Number of shares for options outstanding 44,100 shares 39,500 shares 83,600 shares
Exercise price ¥1 ¥1
Exercisable period August 1, 2016 - July 31, 2028 August 1, 2016 - July 31, 2028
⑧ Stock option plan approved by the shareholders on June 25, 2014 and resolved by the Board of Directors on July 31, 2014Stock options granted on
August 28, 2014Stock options granted on
August 28, 2014 Total
Number of shares for options granted 76,900 shares 57,400 shares 134,300 shares
Number of shares for options outstanding 76,900 shares 57,400 shares 134,300 shares
Exercise price ¥1 ¥1
Exercisable period August 1, 2017 - July 31, 2029 August 1, 2017 - July 31, 2029
⑨ Stock option plan approved by the shareholders on June 23, 2015 and resolved by the Board of Directors on February 23, 2016Stock options granted on
March 30, 2015Stock options granted on
March 30, 2015 Total
Number of shares for options granted 23,700 shares 46,300 shares 70,000 shares
Number of shares for options outstanding 23,700 shares 46,300 shares 70,000 shares
Exercise price ¥1 ¥1
Exercisable period September 1, 2018 - February 28, 2031
September 1, 2018 - February 28, 2031
13 RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses are expensed as incurred. Research and development expenses, which are included in selling, general and administrative expenses, totaled ¥11,299 million and ¥18,264 million ($156,732 thousand) for the fiscal period ended December 31, 2015 and the fiscal year ended December 31, 2016, respectively. There are no research and development expenses included in total manufacturing expenses for the fiscal period ended December 31, 2015 and the fiscal year ended December 31, 2016.
99
14 TRANSACTIONS WITH RELATED PARTIES
Director and auditor of the significant corporate affiliateFor the fiscal period ended December 31, 2015
Type Name LocationCapital or
InvestmentsBusiness orProfession
Voting Rights Held (%)
Relationship with the Related Parties
Transactions AmountAccount Name
Balance as of December 31,
2015
Executive Lee. Kuo-Hsin — —
Taiwan Shiseido Co.,
Ltd.ExecutiveDirector
— Real estate leasing
Real estate leasing (*1) ¥10 million — —
Company with a majority of the
voting rights held by an executive or close relative
Lucien HenriS.A.S (*2) France
130thousand
EUR
Sales of cosmetics and
fragrances— Sales of
products
Sales of cos-metics and fra-grances (*3)
¥30 million Accounts receivable ¥0 million
*1 Rents are determined based on the average price near the estate
2 100% directly held by an executive of Beauté Prestige International S.A. (BPI. S.A.), Mr. Eric HENRY and close relatives
3 Transactions are under normal terms and conditions, and considered as independent third-party transactions
For the fiscal year ended December 31, 2016
Type Name LocationCapital or
InvestmentsBusiness orProfession
Voting Rights Held (%)
Relationship with the Related Parties
Transactions AmountAccount Name
Balance as of December 31,
2016
Company with a majority of the
voting rights held by an executive or close relative
Lucien HenriS.A.S (*1) France
130thousand
EUR
Sales of cosmetics and
fragrances— Sales of
products
Sales ofcosmetics and
fragrances (*2)
¥20 million ($171
thousand)
Accounts receivable
¥0 million($0 thousand)
*1 100% directly held by an executive of BPI S.A., Mr. Eric HENRY and close relatives
*2 Transactions are under normal terms and conditions, and considered as independent third-party transactions
15 ACCOUNTING FOR LEASES
The Companies have various lease agreements whereby the Companies act both as a lessee and a lessor.
(1) Finance leases Non-ownership-transfer finance lease transactions ① As lessee: Leased assets mainly consist of molds, tools, fixtures, and software. ② As lessor: None
(2) Operating leases Lease obligations under operating leases at December 31, 2015 and 2016 are as follows:
Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
① As lessee:
The scheduled maturities of future lease rental payments on such
non-cancelable lease contracts are as follows:
Due within 1 year ¥ 7,510 ¥ 9,033 $ 77,516
Due after 1 year 31,348 32,202 276,340 ¥38,859 ¥41,235 $353,857
② As lessor:
The scheduled maturities of future lease rental payments on such
non-cancelable lease contracts are as follows:
Due within 1 year ¥ 172 ¥ 172 $ 1,476
Due after 1 year 3,925 3,753 32,206 ¥ 4,097 ¥ 3,925 $ 33,682
100
Notes to the Consolidated Financial Statements
16 DERIVATIVE FINANCIAL INSTRUMENTS
The contract amount, estimated fair value and unrealized gain (loss) of the derivative instruments as of December 31, 2015 are as follows:
① Derivatives that do not meet the criteria for hedge accountingMillions of yen
2015/12
Contract amount
TotalSettled over
1 yearEstimatedfair value
Unrealizedgain (loss)
Foreign exchange contracts: Selling US$ ¥11,380 — ¥ (6) ¥ (6)
GBP 1,737 — 9 9
AU$ 187 — (6) (6)
Foreign exchange contracts: Buying US$ 2,299 — 21 21
EUR 26,397 — (34) (34)
— — ¥(16) ¥(16)
* Calculation method of fair value
Based on the amount presented by the counterparty financial institution
② Derivatives that meet the criteria for hedge accountingMillions of yen
2015/12
Contract amount Contract amount
Main hedged item TotalSettled over
1 yearEstimatedfair value
Interest rate and currency swap contracts: To pay fixed yen/receive variable US$
Foreign currency long-term debt ¥ 7,500 ¥ 2,500 ¥2,469
Interest rate swap contracts: To pay fixed/receive variable Long-term debt 21,025 20,295 (609)
* Calculation method of fair value
Based on the amount presented by the counterparty financial institution
The contract amount, estimated fair value and unrealized gain (loss) of the derivative instruments as of December 31, 2016 are as follows:
① Derivatives that do not meet the criteria for hedge accountingMillions of yen
2016/12
Contract amount
TotalSettled over
1 yearEstimatedfair value
Unrealizedgain (loss)
Foreign exchange contracts: Selling US$ ¥12,828 — ¥(593) ¥(593) GBP 1,602 — (19) (19) AU$ 159 — 1 1
Foreign exchange contracts: Buying US$ 1,048 — 10 10 — — ¥(601) ¥(601)
* Calculation method of fair value
Based on the amount presented by the counterparty financial institution
Thousands of U.S. dollars (Note 1)
2016/12
Contract amount
TotalSettled over
1 yearEstimatedfair value
Unrealizedgain (loss)
Foreign exchange contracts: Selling US$ $110,083 — $(5,088) $(5,088) GBP 13,747 — (163) (163) AU$ 1,364 — 8 8
Foreign exchange contracts: Buying US$ 8,993 — 85 85 — — $(5,157) $(5,157)
101
② Derivatives that meet the criteria for hedge accountingMillions of yen
2016/12
Contract amount
Main hedged item TotalSettled over
1 yearEstimatedfair value
Interest rate and currency swap contracts: To pay fixed yen/receive variable US$
Foreign currency long-term debt ¥ 2,500 — ¥ 718
Interest rate swap contracts: To pay fixed/receive variable Long-term debt 20,295 ¥19,565 (741)
* Calculation method of fair value
Based on the amount presented by the counterparty financial institution
Thousands of U.S. dollars (Note 1)
2016/12
Contract amount
Main hedged item TotalSettled over
1 yearEstimatedfair value
Interest rate and currency swap contracts: To pay fixed yen/receive variable US$
Foreign currency long-term debt $ 21,453 — $ 6,161
Interest rate swap contracts: To pay fixed/receive variable Long-term debt 174,161 $167,896 (6,358)
17 GAIN ON TRANSFER OF BUSINESS
For the fiscal period ended December 31, 2015 In addition to such items as compensation for early license agreement termination and the extraordinary bonus that arose in connection with the transfer of Jean Paul GAULTIER fragrance intellectual property rights, the gain on transfer of business com-prised income from the transfer of the Ayura brand and subsidiary SHISEIDO Kozmetic Anonim Sirketi.
For the fiscal year ended December 31, 2016 It resulted from the transfer of Jean Paul GAULTIER fragrance intellectual property rights.
18 GAIN (LOSS) ON SALES AND DISPOSAL OF PROPERTY, PLANT AND EQUIPMENT
For the fiscal year ended December 31, 2016 Mainly the gain on the sale of land at the closed Kamakura Factory.
19 IMPAIRMENT LOSS
For the fiscal period ended December 31, 2015 The Company incurred impairment losses on overseas non-current assets.
Use Type Location
Business-use assets Buildings and structures, and others United States
Idle assets Other intangible fixed assets, and others China, and others
The Shiseido Group’s business-use assets are grouped according to the minimum independent cash flow-generating unit, based on business classification. Idle assets are pooled according to individual property. Regarding business-use assets, their book values were written-down to their recoverable amount, resulting in other expenses of ¥62 million. The recoverable amount was estimated based on the net sales value, which was assessed based on the expected selling price. With respect to idle assets, the Group’s assets that are no longer expected to be used in the future have been devalued to their recoverable amount, resulting in ¥90 million of other expenses. The recoverable amount was estimated based on the net sales value, which was assessed based on the expected selling price.
For the fiscal year ended December 31, 2016
Use Type Location
Idle assets Other intangible fixed assets, and others China, and others
102
Notes to the Consolidated Financial Statements
The Shiseido Group’s business-use assets are grouped according to the minimum independent cash flow-generating unit, based on business classification. Idle assets are pooled according to individual property. Regarding idle assets, the Group’s assets that are no longer expected to be used in the future have been devalued to their recoverable amount, resulting in ¥153 million ($1,312 thousand) of other expenses. The recoverable amount was estimated based on the net sales value, which was assessed based on the expected selling price.
20 STRUCTURAL REFORM EXPENSES
For the fiscal period ended December 31, 2015 and the fiscal year ended December 31, 2016 Structural reform expenses relate to retirement premiums paid to early retirees and other expenses included in temporary expenses attributable to structural reforms in progress worldwide.
21 LOSS ON LIQUIDATION OF SUBSIDIARIES AND AFFILIATES
For the fiscal period ended December 31, 2015 The Company reported losses on the transfer of a subsidiary in Greece and the liquidation of a subsidiary in India.
22 INFORMATION SECURITY EXPENSES
For the fiscal year ended December 31, 2016 Information security expenses refer to the costs incurred due to illegal access by a third party to the official online shopping website of a consolidated subsidiary. Expenses comprise the costs required to properly identify the causes, apologize to consumers and put in place countermeasures.
23 OTHER COMPREHENSIVE INCOME
The components of other comprehensive income including reclassification adjustments and tax (expense) or benefit for the fiscal period ended December 31, 2015 and the fiscal year ended December 31, 2016 are as follows:
Millions of yenThousands of
U.S. dollars (Note 1)
2015/12 2016/12 2016/12
Unrealized gains (losses) on available-for-sale securities, net of taxes: Increase (decrease) during the fiscal year ¥ 2,435 ¥ (1,661) $ (14,253)
Reclassification adjustments 70 (402) (3,449)
Amount before tax 2,506 (2,064) (17,712)
Tax (expense) or benefit (815) 1,250 10,726
Subtotal ¥ 1,690 ¥ (813) $ (6,976)
Foreign currency translation adjustments: Increase (decrease) during the fiscal year ¥ (9,180) ¥(14,897) $(127,838)
Reclassification adjustments (60) 0 0
Amount before tax (9,241) (14,897) (127,838)
Tax (expense) or benefit 67 (9) (77)
Subtotal ¥ (9,173) ¥(14,906) $(127,915)
Adjustments for retirement benefits: Increase (decrease) during the fiscal year ¥ (8,583) ¥(20,739) $(177,971)
Reclassification adjustments 3,590 7,294 62,593
Amount before tax (4,992) (13,445) (115,378)
Tax (expense) or benefit 524 4,309 36,977
Subtotal ¥ (4,468) ¥ (9,136) $ (78,400)Share of other comprehensive income of associates accounted for under the equity method: Increase (decrease) during the fiscal year ¥ (55) ¥ (51) $ (437)
Reclassification adjustments — (38) (326)
Subtotal ¥ (55) ¥ (90) $ (772)
Total other comprehensive income ¥(12,005) ¥(24,946) $(214,073)
103
24 BUSINESS COMBINATIONS
(Acquisition)Shiseido Americas Corporation, a subsidiary of the Company, signed an agreement with Alticor Inc. to acquire100% of the membership interests in Gurwitch Products, LLC., a marketer of global prestige cosmetics andskincare brands on June 2, 2016, and acquired the membership interests on July 12, 2016.
(1) Outline of Business Combination ① Name of the acquired company Name of the acquired company: Gurwitch Products, LLC. Business area: Distribution of cosmetics under Laura Mercier and RéVive brand names
② Major reasons for the business combination In consistency with the Company’s medium-to-long-term strategy VISION 2020 goal to accelerate global growth and its strategy to leverage regional strengths, assets and expertise for global benefit, the acquisition was carried out because Laura Mercier, which has a strong presence in the prestige make-up market, and prestige skincare brand RéVive are highly complementary to the Shiseido Group’s portfolio of prestige make-up and skincare brands, and the combination is expected to provide the Shiseido Group with significant growth opportunities, expanded customer reach and an even stron-ger foothold in the fast-growing prestige make-up market.
③ Effective date of the business combination July 12, 2016
④ Legal form of the business combination Acquisition of membership interests in exchange for cash
⑤ Name of the acquired company after the combination No change
⑥ Ratio of acquired voting rights 100%
⑦ Major reasons for the determination of the acquiring company The determination was made because Shiseido Americas Corporation, a subsidiary of the Company, acquired the membership interests and cosmetics brands in exchange for cash.
(2) Period for which the operating results of the acquired company are included in the consolidated financial statements
From July 12, 2016 to December 31, 2016
(3) Breakdown of cost and consideration for the acquisition of the acquired company by type Consideration for the acquisition Cash: ¥25,717 million ($220,689 thousand) Cost: ¥25,717 million ($220,689 thousand)
(4) Content and amount of major acquisition-related costs Advisory expenses and others: ¥576 million ($4,942 thousand)
(5) Amount of goodwill arising from the business combination, cause of the goodwill, and amortization method and period ① Amount of goodwill arising from the business combination ¥6,628 million ($56,878 thousand) ② Cause of the goodwill The goodwill arose due to future additional earnings power that is expected from future business development. ③ Amortization method and period By straight-line method over 10 years
(6) Amounts of assets received and liabilities assumed on the date of business combination, and their major components
Current assets ¥ 8,658 million ($74,298 thousand)
Non-current assets ¥12,396 million ($106,376 thousand)
Total assets ¥21,055 million ($180,683 thousand)
Current liabilities ¥(1,965) million ($16,862 thousand)
Total liabilities ¥(1,965) million ($16,862 thousand)
104
Notes to the Consolidated Financial Statements
(7) Amount allocated to intangible assets other than goodwill and the breakdown by major type, and weighted average amortization period for all the intangible assets and by major type
Breakdown by major type Amount Amortization period Trademarks ¥7,836 million ($67,244 thousand) Indefinite useful life Customer relationships ¥3,491 million ($29,957 thousand) 10 years
(8) Approximate amount of impact on the consolidated statements of income for the fiscal year ended December 31, 2016 assuming that the business combination was completed on the first day of the fiscal year ended December 31, 2016, and the calculation method
Net sales ¥9,926 million ($85,179 thousand) Operating loss ¥ 184 million ($1,578 thousand)
(Method of calculating the proforma information)The proforma information is the difference between the amounts of net sales and profits and loss information calculated assuming that the business combination was completed on the first day of the fiscal year ended December 31, 2016 and the impact of net sales and profits and loss information on the consolidated statement of income. In addition, amortization is calculated by assuming the goodwill and other intangible assets recognized upon the business combination were recog-nized on the first day of the fiscal year ended December 31, 2016.
This note is not subject to independent audit.
25 SEGMENT INFORMATION
(1) General information about reportable segments With respect to its reportable segments, the Company is able to obtain delineated financial data from among its structural units. Accordingly, its segments are subject to regular examination in order to assist decision-making on allocation of managerial resources and evaluation of business performance by the Board of Directors. Shiseido’s main business is the production and sale of cosmetics. The Company engages in business activities under a matrix organization encompassing five brand categories (Prestige, Fragrance, Cosmetics, Personal Care and Professional) based on consumer purchasing style and six regions (Japan, China, Asia Pacific, the Americas, EMEA and Travel Retail). This matrix organiza-tion give the leader in each region broad authority as well as responsibility for sales and profits. Coupled with this broad authority and responsibility, the leaders in each region exercise flexible decision-making. In specific terms, the Company’s six reportable segments comprise the “Japan Business,” “China Business,” “Asia Pacific Business,” “Americas Business,” “EMEA Business” and “Travel Retail Business.” Moreover, and in line with this matrix, the Company has revised the manner in which it allocates assets and no longer allocates segment assets. The Japan Business is mainly comprised of the domestic business by brand category (Prestige, Fragrance, Cosmetics, Personal Care and Professional), the healthcare business (production and sale of health and beauty foods as well as over-the-counter drugs), the frontier science business (the production and sale of such items as cosmetics ingredients, ethical drugs, beauty and medical-use cosmetics and purification and analysis equipment) and the restaurant business, and other businesses. The China Business covers business in China by brand category (Prestige, Fragrance, Cosmetics, Personal Care and Professional). The Asia Pacific Business covers business in the Asia and Oceania regions excluding Japan and China by brand category (Prestige, Fragrance, Cosmetics, Personal Care and Professional). The Americas Business covers business in the Americas region by brand category (Prestige, Fragrance and Professional). The EMEA Business covers business in Europe, the Middle East and Africa region by brand category (Prestige and Fragrance).The Travel Retail Business covers the operation of worldwide duty-free stores excluding Japan by brand category (Prestige and Fragrance).
(Change in business segment classification) Effective from the fiscal year ended December 31, 2016, reportable segment classifications have been changed from the “Japan Business” and “Global Business” segments to the “Japan Business,” “China Business,” “Asia Pacific Business,” “Americas Business,” “EMEA Business” and “Travel Retail Business” segments in accordance with changes in the organizational structure of the Shiseido Group. Segment information for the corresponding period of the previous fiscal year has been restated in line with changes in the method of classifying reportable segments.
(2) Basis of measurement for reported segment sales, profit or loss and other material items The accounting treatment for the Group’s reported business segments is generally the same as described in 2. SUMMARYOF SIGNIFICANT ACCOUNTING POLICIES. Segment income is based on operating income. The prices of intersegment transactions and transfers are determined by price negotiations based on the Company’ssubmission of preferred prices after taking market conditions into account.
(3) Information about reported segment sales, profit or loss, segment assets and other material items Segment information as of and for the fiscal period ended December 31, 2015 and the fiscal year ended December 31, 2016 is as follows:
105
Millions of yen
2015/12
Japan Business
ChinaBusiness
Asia PacificBusiness
AmericasBusiness
EMEABusiness
Travel RetailBusiness Subtotal Adjustment*2
Total
Net Sales Sales to outside customers ¥295,722 ¥125,696 ¥52,739 ¥167,528 ¥104,178 ¥17,193 ¥763,058 — ¥763,058
Intersegment sales or transfers 30,946 271 453 10,763 5,153 — 47,587 ¥(47,587) —
Total ¥326,668 ¥125,967 ¥53,192 ¥178,292 ¥109,331 ¥17,193 ¥810,646 ¥(47,587) ¥763,058
Segment Income/Loss*3 ¥ 43,288 ¥ (79) ¥ 1,044 ¥ (5,058) ¥ 4,913 ¥ 2,465 ¥ 46,573 ¥ (8,913) ¥ 37,660
Other Items
Depreciation and Amortization ¥ 9,240 ¥ 6,714 ¥ 1,940 ¥ 10,340 ¥ 2,354 ¥ 445 ¥ 31,035 ¥ 725 ¥ 31,761
Amortization of Goodwill 106 429 69 4,566 — — 5,172 — 5,172
Millions of yen
2016/12
Japan Business
ChinaBusiness
Asia PacificBusiness
AmericasBusiness
EMEA*1
BusinessTravel Retail
Business Subtotal Adjustment*2Total
Net Sales Sales to outside customers ¥407,628 ¥120,479 ¥49,633 ¥162,556 ¥85,215 ¥24,793 ¥850,306 — ¥850,306 Intersegment sales or transfers 46,404 101 234 9,992 4,256 — 60,989 ¥(60,989) —
Total ¥454,033 ¥120,580 ¥49,868 ¥172,548 ¥89,471 ¥24,793 ¥911,296 ¥(60,989) ¥850,306 Segment Income/Loss*3 ¥ 57,417 ¥ 4,166 ¥ 1,102 ¥ (11,813) ¥ (7,224) ¥ 5,470 ¥ 49,118 ¥(12,338) ¥ 36,780 Other Items
Depreciation and Amortization ¥ 12,646 ¥ 5,419 ¥ 1,879 ¥ 10,050 ¥ 3,024 ¥ 536 ¥ 33,557 ¥ 922 ¥ 34,480 Amortization of Goodwill 141 385 61 4,327 — — 4,916 — 4,916
Thousands of U.S. dollars (Note 1)
2016/12
Japan Business
ChinaBusiness
Asia PacificBusiness
AmericasBusiness
EMEA*1
BusinessTravel Retail
Business Subtotal Adjustment*2 Total
Net Sales Sales to outside customers $3,498,052 $1,033,888 $425,924 $1,394,971 $731,270 $212,760 $7,296,884 — $7,296,884 Intersegment sales or transfers 398,215 866 2,008 85,746 36,522 — 523,375 $(523,375) —
Total $3,896,275 $1,034,754 $427,941 $1,480,717 $767,793 $212,760 $7,820,269 $(523,375) $7,296,884 Segment Income/Loss*3 $ 492,722 $ 35,750 $ 9,456 $ (101,373) $ (61,992) $ 46,940 $ 421,505 $ (105,878) $ 315,626 Other Items
Depreciation and Amortization $ 108,521 $ 46,503 $ 16,124 $ 86,243 $ 25,950 $ 4,599 $ 287,968 $ 7,912 $ 295,889 Amortization of Goodwill 1,209 3,303 523 37,132 — — 42,186 — 42,186
*1 The EMEA Business refers to Europe, the Middle East and Africa regions.
*2 Details of adjustments are as follows:
(1) The “Segment Income (Loss)” adjustment relates to intersegment transaction eliminations amounting to ¥1,775 million and ¥2,539 million
($21,788 thousand), Company-wide expenses totaling ¥(10,689) million and ¥(14,877) million ($127,666 thousand) not allocated to each
segment, as of December 31, 2015 and 2016, respectively.
(2) The “Depreciation and Amortization” adjustment refers to depreciation expenses related to company-wide assets and intersegment elimina-
tions. Amortization of long-term prepaid expenses are included in “Depreciation and Amortization.”
*3 Segment income (loss) is based on operating income described in the consolidated statements of income.
*4 The amounts of segment assets and liabilities do not fall within the scope of periodic consideration for the purposes of determining the alloca-
tion of management assets or the evaluation of performance. As a result, details of segment assets and liabilities are not presented.
106
Notes to the Consolidated Financial Statements
(Related Information)For the fiscal period ended December 31, 2015① Information on products and services Sales to outside customers in the cosmetics business exceed 90% of net sales of the consolidated statement of income and, therefore, the Company omits this disclosure.② Geographical information
Ⅰ Net salesMillions of yen
2015/12
JapanAmericas
EuropeAsia/Oceania
Total U.S.A. China
¥296,903 ¥155,303 ¥136,557 ¥111,818 ¥199,033 ¥132,446 ¥763,058
* Classification of net sales is determined by country or geographical location.
Ⅱ Property, Plant and EquipmentMillions of yen
2015/12
JapanAmericas
EuropeAsia/Oceania
Total U.S.A. China
¥81,774 ¥21,633 ¥21,559 ¥7,076 ¥23,797 ¥14,038 ¥134,281
③ Main customers There is no outside customer representing 10% or more of net sales of the consolidated statement of income and, therefore, the Company omits this disclosure.
For the fiscal year ended December 31, 2016① Information on products and services Sales to outside customers in the cosmetics business exceed 90% of net sales of the consolidated statement of income and, therefore, the Company omits this disclosure.② Geographical information
Ⅰ Net salesMillions of yen
2016/12
JapanAmericas
EuropeAsia/Oceania
Total U.S.A. China
¥407,735 ¥148,351 ¥130,176 ¥95,301 ¥198,918 ¥129,820 ¥850,306
Thousands of U.S. dollars (Note 1)
2016/12
JapanAmericas
EuropeAsia/Oceania
Total U.S.A. China
$3,498,970 $1,273,071 $1,117,102 $817,823 $1,707,011 $1,114,047 $7,296,884
* Classification of net sales is determined by country or geographical location.
Ⅱ Property, Plant and EquipmentMillions of yen
2016/12
JapanAmericas
EuropeAsia/Oceania
Total U.S.A. China
¥102,054 ¥23,290 ¥23,213 ¥7,425 ¥23,423 ¥11,972 ¥156,194
Thousands of U.S. dollars (Note 1)
2016/12
JapanAmericas
EuropeAsia/Oceania
Total U.S.A. China
$875,774 $199,862 $199,201 $63,717 $201,004 $102,737 $1,340,375
③ Main customers information There is no outside customer representing 10% or more of net sales of the consolidated statement of income and, therefore,
the Company omits this disclosure.
107
Notes to the Consolidated Financial Statements
(4) Information about segment loss on impairment of fixed assets
Millions of yen
2015/12
Japan Business China BusinessAsia PacificBusiness
AmericasBusiness
EMEABusiness
Travel RetailBusiness
Total
¥3 ¥62 — ¥62 ¥24 — ¥153
Millions of yen
2016/12
Japan Business China BusinessAsia PacificBusiness
AmericasBusiness
EMEABusiness
Travel RetailBusiness
Total
— ¥153 ¥0 — — — ¥153
Thousands of U.S. dollars (Note 1)
2016/12
Japan Business China BusinessAsia PacificBusiness
AmericasBusiness
EMEABusiness
Travel RetailBusiness
Total
— $1,312 $0 — — — $1,312
(5) Information about segment unamortized goodwill
Millions of yen
2015/12
Japan Business China BusinessAsia PacificBusiness
AmericasBusiness
EMEABusiness
Travel RetailBusiness
Total
¥886 ¥3,362 ¥270 ¥54,907 ¥2 — ¥59,430
Millions of yen
2016/12
Japan Business China BusinessAsia PacificBusiness
AmericasBusiness
EMEABusiness
Travel RetailBusiness
Total
¥745 ¥2,836 ¥195 ¥56,015 ¥2 — ¥59,795
Thousands of U.S. dollars (Note 1)
2016/12
Japan Business China BusinessAsia PacificBusiness
AmericasBusiness
EMEABusiness
Travel RetailBusiness
Total
$6,393 $24,337 $1,673 $480,691 $17 — $513,129
26 SUBSEQUENT EVENTS
(Change in business segment classification) In line with changes to its internal management classification method, the Company has revised its reportable segments that comprised the “Japan Business,” “China Business,” “Asia Pacific Business,” “Americas Business,” “EMEA Business” and “Travel Retail Business” into the “Japan Business,” “China Business,” “Asia Pacific Business,” “Americas Business,” “EMEA Business,” “Travel Retail Business” and “Professional Business” from the fiscal year ending December 31, 2017. Steps are currently being taken to calculate the amounts of net sales, segment income/(loss) and other items by reportable segment for the fiscal year ended December 31, 2016 based on this change in reportable segment classification.
108
To the Shareholders and Board of Directors of
Shiseido Company, Limited:
We have audited the accompanying consolidated financial statements of Shiseido Company, Limited and its consolidated subsidiaries,
which comprise the consolidated balance sheets as at December 31, 2015 and 2016, and the consolidated statements of income,
statements of comprehensive income, statements of changes in net assets and statements of cash flows for the nine-month period
ended December 31, 2015 and the year ended December 31, 2016, and a summary of significant accounting policies and other
explanatory information.
Management’s Responsibility for the Consolidated Financial Statements
Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with
accounting principles generally accepted in Japan, and for such internal control as management determines is necessary to enable the
preparation of consolidated financial statements that are free from material misstatements, whether due to fraud or error.
Auditor’s Responsibility
Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in
accordance with auditing standards generally accepted in Japan. Those standards require that we comply with ethical requirements and
plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material
misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial
statements. The procedures selected depend on our judgement, including the assessment of the risks of material misstatement of
the consolidated financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control
relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures
that are appropriate in the circumstances, while the objective of the financial statement audit is not for the purpose of expressing an
opinion on the effectiveness of the entity’s internal control. An audit also includes evaluating the appropriateness of accounting policies
used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Opinion
In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Shiseido Company,
Limited and its consolidated subsidiaries as at December 31, 2015 and 2016, and their financial performance and cash flows for the
nine-month period ended December 31, 2015 and the year ended December 31, 2016 in accordance with accounting principles generally
accepted in Japan.
Convenience Translation
The U.S. dollar amounts in the accompanying consolidated financial statements with respect to the nine-month period ended December 31,
2016 are presented solely for convenience. Our audit also included the translation of yen amounts into U.S. dollar amounts and, in our
opinion, such translation has been made on the basis described in Note 1 to the consolidated financial statements.
April 7, 2017
Tokyo, Japan
Independent Auditor’s Report
109
Composition of Shareholders by Number of Shares
Other JapaneseCompanies5.24%
Treasury Stock0.17%
Securities Companies2.65%
ForeignInvestors37.34%
Individuals14.71%
Financial Institutions39.86%
Composition of Shareholders (%)
(By number of shares) 2015/12 2016/12
Foreign Investors 38.57 37.34
Financial Institutions 37.64 39.86
Individuals 17.22 14.71
Other Japanese Companies 4.33 5.24
Securities Companies 1.99 2.65
Treasury Stock 0.22 0.17
(By number of shareholders) 2015/12 2016/12
Foreign Investors 1.22 1.44
Financial Institutions 0.17 0.18
Individuals 97.42 97.03
Other Japanese Companies 1.08 1.24
Securities Companies 0.09 0.08
Treasury Stock 0.00 0.00
Number of Shareholders
45,552
Common Shares Issued and Outstanding
400,000,000 (including 700,745 in treasury stock)
Head Office
Shiseido Company, Limited5-5, Ginza 7-chome, Chuo-ku
Tokyo 104-0061, Japan
Tel: +81-3-3572-5111
Foundation
September 17, 1872
Incorporation
June 24, 1927
Capital
¥64,506,725,140
Number of Employees
36,549 [9,427]
Note: The number of employees shown denotes full-time employees. Annual
average number of temporary employees is shown in brackets.
Temporary employees include part-time workers. Dispatched employ-
ees are excluded.
Fiscal Year-End
December 31
Shareholders’ Meeting
The Ordinary General Meeting of Shareholders
is held in late March.
Stock Listings
Common Stock: Tokyo Stock Exchange (Code: 4911)
American Depositary Receipts: U.S. Over-the-Counter
American Depositary Receipts
CUSIP: 824841407
Ratio (ADR:ORD): 1:1
Exchange: Over-the-Counter
Symbol: SSDOY
Depositary: The Bank of New York Mellon
101 Barclay Street, 22W
New York, NY 10286, U.S.A.
Accounting Auditors
KPMG AZSA LLC
Share Registrar
Sumitomo Mitsui Trust Bank, Limited
4-1, Marunouchi 1-chome,
Chiyoda-ku, Tokyo 100-8233, Japan
Principal Shareholders
Shareholders
Number of
shares held
(thousands)
Percentageof
shareholding
The Master Trust Bank of Japan, Ltd.
(Trust Account)34,085 8.53
Mizuho Bank, Ltd. 21,226 5.31
Japan Trustee Services Bank, Ltd.
(Trust Account)17,354 4.34
BNYM TREATY DTT 15 9,590 2.40
Association of Shiseido Employees’
Investment in the Company’s shares7,419 1.85
JP MORGAN CHASE BANK 380055 7,390 1.85
Sompo Japan Nipponkoa Insurance Inc. 5,934 1.48
Nippon Life Insurance Company 5,615 1.40
Mitsui Sumitomo Insurance Company, Limited 5,600 1.40
STATE STREET BANK AND
TRUST COMPANY 5052255,508 1.37
Note: Calculations of percentage of shareholding are based on the total
number of issued and outstanding shares excluding treasury stock.
(As of December 31, 2016)
Corporate and Investor Information
110
For further information, please contact:
Te l: +81-3-3572-5111
http://www.shiseidogroup.com/inquiry/mail/
Investor Relations Department
Shiseido Company, Limited
6-2, Higashi-shimbashi 1-chome,
Minato-ku, Tokyo 105-8310, Japan
Summary of Information by Topic
Topic Relevant Section of Annual Report Shiseido Group Corporate Website
http://www.shiseidogroup.com/
Management Principles >> •Our Mission, Values and Way …… p. 6About Us – Our Mission, Values and Way
http://www.shiseidogroup.com/company/principle/
Characteristics of Operations >>•Shiseido’s DNA …………………… p. 8
•Facts & Figures ………………… p. 10
•Market Data ……………………… p. 68
About Us – Vision and Values
http://www.shiseidogroup.com/company/vision/
About Us – Corporate Profi le
http://www.shiseidogroup.com/company/structure/
About Us – History of Shiseido
http://www.shiseidogroup.com/company/past/
Brand Portfolio >> • Brands at a Glance ……………… p. 12
•Region × Brand …………………… p. 23
Brands
http://www.shiseidogroup.com/brands/
Medium-to-Long-Term
Management Strategy >>
•The CEO on Shiseido’s Management Strategy ………… p. 14
•The CFO on Shiseido’s Financial Strategy …………………………… p. 46
Investors – Management Policy
http://www.shiseidogroup.com/ir/strategy/
Investors – IR Library
http://www.shiseidogroup.com/ir/library/
Sustainability Strategy >> •Looking toward 2020 and Beyond ……………… p. 36
Sustainability
http://www.shiseidogroup.com/sustainability/
Investors – IR Library/Non-fi nancial Information Report
Regarding ESG
http://www.shiseidogroup.com/ir/library/esg/
Engagement with
Local Communities >> •Sustainability Strategy ………… p. 38
•Aspirations in Three Areas …… p. 40
Sustainability –
Participation in Community and Development
http://www.shiseidogroup.com/sustainability/community/
Environmental Initiatives >> •Sustainability Strategy ………… p. 38
•Aspirations in Three Areas …… p. 40
Sustainability – Environment
http://www.shiseidogroup.com/sustainability/env/
Research and Development >> •Generating Innovation …………… p. 42Innovation
http://www.shiseidogroup.com/rd/
Diversity and Inclusion >> •The CEO on Shiseido’s Management Strategy ………… p. 14
Sustainability – Labor Practices
http://www.shiseidogroup.com/sustainability/labor/
Corporate Governance >> •Management Section …………… p. 51Investors – General Meeting of Shareholders/
Corporate Governance
http://www.shiseidogroup.com/ir/account/governance/
Financial Data >> •Data Section ……………………… p. 63Investors – IR Library
http://www.shiseidogroup.com/ir/library/